4. Choice between direct exporting and FDI Aa Aa Giocattolo is a profit-maximizi

Question

4. Choice between direct exporting and FDI Aa Aa Giocattolo is a profit-maximizing firm producing toy cars, which it can produce and sell in Italy, its home country, and in Spain. The average cost curve (AC) on the following graph represents Giocattolo's cost of producing toy cars within one factory, whether in Italy or in Spain. If Giocattolo produces toy cars in one country and sells them in the other, however, it incurs an additional shipping cost equal to $2.00 per transported toy. Tool tip: Mouse over the points to see their coordinates. COST (Dollars per toy carl AC 20 40 60 80 100 QUANTITY IThousands of toy cars] Suppose that at the current market prices of toy cars, the demand for Giocattolo's product is 20,000 toy cars per year in Italy and 10,000 toy cars per year in Spain Based on the Giocattolo's average cost curve, within one factory it can produce 10,000 toy cars at $7.40 per toy, produce 20,000 toy cars at $5.40 per toy, and produce the total of 30,000 toy cars at $4.30 per toy. Complete the following table by indicating Giocattolo's production cost for each scenario.

Explanation / Answer

Case 1:-

Produce 20,000 toys in Italy and 10,000toys in Spain:-

Cost of production :-

For 20,000 toys= 20000*$5.4 =108000

For 10000 toys= 10000*$7.4 =74000

So total cost = $108000+$74000=$182,000

Case 2:- Produce 30,000 toys at the same factory

Cost of production=30,000*$4.3=$129,000

Answer:- If 30,000 toys are produced in Italy and 10000 toys are transported to Spain:-

Cost of Production of 30,000 toys:- 30,000*$4.3=$129,000

Shipment cost of 10,000 toys:- 10,000*$2 =$20,000

So total cost = $129,000+$20,000=$149,000

Answer:- :- If 30,000 toys are produced in Spain and 20000 toys are transported to Italy:-

Cost of Production of 30,000 toys:- 30,000*$4.3=$129,000

Shipment cost of 10,000 toys:- 20,000*$2 =$40,000

So total cost = $129,000+$40,000=$169,000

Answer :-

Option 1:- If 30,000 toys are produced in Spain and 20000 toys are transported to Italy:-

Cost of Production of 30,000 toys:- 30,000*$4.3=$129,000

Shipment cost of 10,000 toys:- 20,000*$2 =$40,000

So total cost = $129,000+$40,000=$169,000

Option 2:- Produce 20,000 toys in Italy and 10,000toys in Spain:-

Cost of production :-

For 20,000 toys= 20000*$5.4 =108000

For 10000 toys= 10000*$7.4 =74000

So total cost = $108000+$74000=$182,000

Option 3:- If 30,000 toys are produced in Italy and 10000 toys are transported to Spain:-

Cost of Production of 30,000 toys:- 30,000*$4.3=$129,000

Shipment cost of 10,000 toys:- 10,000*$2 =$20,000

So total cost = $129,000+$20,000=$149,000

The best option will be:-

Produce 30,000 toys cars in Italy and ship 10000 toy cars to Spain

Reason:- The above option has the minimum total production and shipping cost.

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