A large wood products company is negotiating a contract to sell plywood overseas
ID: 1167396 • Letter: A
Question
A large wood products company is negotiating a contract to sell plywood overseas. The fixed cost that can be allocated to the production of plywood is $80,000 per month. The variable cost per thousand board feet is $155.50. The price charged will be determined by
p = $600 (0.5)D per 1,000 board feet. (2.2)
a. For this situation, determine the optimal monthly sales volume for this product and calculate the profit (or loss) at the optimal volume.
b. What is the domain of profitable demand during a month?
(c) Calculate the average cost and the marginal cost per product at optimum production volume.
(d) If the company has capacity to produce only 60% of the optimal quantity determined in (a) above, what will be the unit price and the total profit that the company can generate?
Explanation / Answer
a.
Optimal monthly sales volume would be the break-even point of sales. In this situation the firm earns no-profit or no-loss.
P = ($600 – 0.5D) / 1,000
= $0.6 – 0.0005D
= $0.6 – 0.0005×1 (The quantity D is considered as 1 unit)
= $0.5995
Variable cost per unit = $155.50 / 1,000 = $0.1555
Contribution per unit = Price P – Variable cost per unit
= $0.5995 - $0.1555
= $0.444
Optimal monthly sales volume = Fixed cost for the month / Contribution per unit
= $80,000 / $0.444
= 180,180 (Answer)
Profit/ Loss = (Contribution per unit × sales volume) – Fixed cost
= ($0.444 × 180,180) - $80,000
= $80,000 - $80,000
= 0 (Answer)
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