8. Consider a firm with the following total variable costs (TVC). Q TVC Q TVC 0
ID: 1169354 • Letter: 8
Question
8. Consider a firm with the following total variable costs (TVC).
Q TVC Q TVC
0 0 4 38
1 5 5 55
2 13 6 75
3 24
The firm also has annualized fixed costs associated with its equipment of $30, but the annualized resale value of the equipment is $20. The market price of the good produced is $15.
(a) If the firm has already purchased the equipment, answer the following: (i) if the firm chooses to operate, what is its best possible output? (Hint: find MC and use marginal analysis.); (ii) Should the firm operate? Show your work and explain.
(b) If the firm has not yet purchased the equipment, should it do so? Explain.
9. A legal services firm processes routine documents for law firm clients in Ohio and Kentucky. Since Indiana law and procedures are similar, it is considering adding clients from that state. In making this decision, the company “allocates” one-third of its existing overhead to the new Indiana “division,” since it is expected to be about one-third of the total operation.
Total company overhead (annualized, pre expansion): $9 million
Revenue minus variable costs, Kentucky/Ohio division: $12 million
Expected Indiana revenue: $6 million
Expected additional costs of Indiana division: $4 million
(a) What is the Indiana division “profit” using the company’s required allocation of costs?
(b) Is this the correct decision for the profit of the organization? What is the appropriate criteria and decision?
Explanation / Answer
8)
a)
1)If a firm has already purchased the equipment and decided to operate, then it should produce goods until selling price equals marginal cost.Here, producing 5 units of goods, the marginal cost is 17 per unit whereas selling price is 15 per unit.Hence, the firm should operate at producing 4 units.
2) If the firm has already purchased the equipment, then firm should not operate. Because at any production level fixed cost + total variable cost is higher than selling price of produced quantities. Hence, operating at any quantity results in a negative net profit for a frim.
b) If the firm has not purchased equipment, then it should not purchses because operating at any quantity will result in negative profit for a firm.
9)
a) Current Indiana overhead = 1/3(9) = 3 million $
Hence, Indiana division profit = 6-3 = 3 million $
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.