Problem Set Seven Solutions

3. Assume that the selling prices, volumes, and material costs for the 1991 model year will not change for fuel tanks and doors produced by the ACF of Bridgeton Industries. Assume also that if manifolds are produced, their selling prices, volume, and material costs will not change either.

2- The per unit profit for 1 Kg of "complete meal" = Price to DM - Total unit cost= 4.40 - 4.92 = (0.52).

Compute the projected profit for the order quantities suggested by the management team under three scenarios: worst case in which sales = 10,000 units, most likely case in which sales = 20,000 units, and best case in which sales = 30,000 units.

Halee set up a lemonade and cookie stand at the end of her street. She is selling lemonade for $0.25 per cup and cookies for $0.25 each. She sells 15 cookies and 35 cups of lemonade. Her total sales can be represented by the expression shown.

2. Refer to the above table to answer this question. Suppose that Mia has a budget of $7 and the price of a litre of soya milk is $1, what is the maximum quantity that Mia might purchase?

In our second assumption, instead of using the cost of goods per cases in 1986, we try to use the percentage it counts in the total expenses which is 50.4% and to find the sales needed to break-even. The detail of the calculation is shown in the answer for questions d. The result is that 95,635, a little bit higher than the estimated sales of 90,000.

We are given the growth rate, but need to calculate the dividend amount and the cost

Explain how a profit maximizing firm determines its optimal level of output, using marginal revenue and marginal cost as criteria:

1. The local Mastermind store sells innovative educational toys. Part of their service is giving advice to customers about the best toys for a particular age group, which requires having more customer service representatives in the store. During the month long Christmas buying season, it makes half of its $500,000 yearly sales. Its contribution margin on average is 40% and its fixed costs for the year are about $150,000. The owner believes that she could make even higher sales, if she had more customer service representatives on the floor during the peak season. She plans on hiring four more people for 200 hours each at $20 per hour. How much additional revenue does she have earn to the nearest dollar

The new owner of a beauty shop is trying to decide whether to hire one, two, or three beauticians. She estimates that profits next year (in thousands of dollars) will vary with demand for her services and has estimated demand in three categories low, medium and high.

If Marlene Herbert were to discontinue place mats, he would miss $270,000 that will go toward Mendel paper company fixed cost. The company currently has a plant overhead that is estimated at $420,000 for the quarter. In addition to the fixed plant overhead, the plant incurs fixed selling and administrative expenses per quarter of $118,000. This draws the company to a total fixed cost of $538,000. If Marlene Herbert were to discontinue the second highest contributor to the fixed cost, he would need to increase the volume of computer paper and lower material cost to help pull the contribution margin of the lowest product up to help support the lost of a whole product line.

* Use the profit maximization rule MR = MC to determine your optimal price and optimal output level now that you have market power. Compare these values with the values you generated in Assignment 1. Determine whether your price higher is or lower.)

a. Assuming, as before, that the equilibrium price and quantity are P* = 75 cents per

1. Current Contribution Dollars = 1,000,000 units x $0.60 = $600,000 2. New Price with 10% Price Reduction= $1.80 Unit Price $1.40 Unit Variable Cost $0.40 Unit Contribution or 22.22% CM 3. $0.40 (x) = $600,000, where x = units (x) = 1,500,000 units 4. Increase in Unit Sales = 500,000 (1,500,000 – 1,000,000 = 500,000) 5. .2222 (x) = $600,000, where x = dollars x = $2,700,000 6. Increase in Dollar Sales = $700,000 ($2,700,000 - $2,000,000)

a) Draw Brennan's average total, marginal revenue and marginal cost curves. (Hints: calculate total revenue (P* times Q) first, and then calculate MR)