A Profitable Opportunity? •As a recent graduate of this college, you have landed

Question

A Profitable Opportunity?

•As a recent graduate of this college, you have landed a job in production management for Universal Clones Inc. You are responsible for the entire company on weekends.

•Your costs are shown below.

Quantity Average Total Cost

    500 200

    501 201

Your current level of production is 500 units. All 500 units have been ordered by your regular customers

•The phone rings. It’s a new customer who wants to buy
1 unit of your product. This means you would have to
increase production to 501 units. Your new customer offers you $450 to produce the extra unit.

A.Should you accept this offer?

B.What is the net change in the firm’s profit?

Is the answer

T C(500units) = 500 200 = $100, 000

T C(501units) = 501 201 = $100, 701

MC = 100, 000 100, 701 = $701

MR = $450 Since the marginal revenue is less than the marginal cost of production you should not accept the offer.

b. 701 450 = $251 = Net change in profits

Explanation / Answer

Both answers are correct.

(a)

Since Marginal cost (As correctly computed) is higher than the price offered (= Marginal revenue), the offer should not be accepted.

(b)

Net change in profit = Additional revenue generated - Additional cost of producing the unit = $450 - $701 = - $251 (Loss)

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