Your company plans to release its first new product on November 1 this year. The

Question

Your company plans to release its first new product on November 1 this year. The manufacturing will be outsourced, but your company will be required to provide the molds for the product at a fixed cost of $150,000 before manufacturing can begin. The molds are expected to last one month before they wear out and new molds need to be purchased. The manufacturer will charge $100/unit made which you will sell to your customers for $350 each. Marketing has provided the following demand forecast for November.

Demand Level

Nov Units Sold

Probability

Low Demand

300

10%

Medium Demand

550

60%

High Demand

1,250

30%

A) How many units does your company need to sell in November to break even? (3 points)

B) What is the total cost (fixed plus variable) in November if the product has low demand? (3 points)

C) What is the expected value of the total cost in November? (3points)

Demand Level

Nov Units Sold

Probability

Low Demand

300

10%

Medium Demand

550

60%

High Demand

1,250

30%

Explanation / Answer

The total cost function for the month of November is

C(Q) = 150,000 + 100Q

The total revenue function is

     TR(Q) = 350Q

A) The company will break even when the total revenue will equal the total cost.

   Total revenue = Total cost
              350Q =  150,000 + 100Q
              250Q =  150,000
                    Q = 600

B) When the product has low demand, the number of units sold is 300. Therefore the total cost is

            C(300) = 150,000 + 100(300)
                        = 150,000 + 30,000
                        = 180,000

Therefore, when the product has low demand, the total cost is $180,000.

C) When the product has medium demand, the number of units sold is 550 and the total cost is

            C(550) = 150,000 + 100(550)
                        = 150,000 + 55,000
                        = 205,000

When the product has high demand, the number of units sold is 1,250 and the total cost is

           C(1250) = 150,000 + 100(1,250)
                        = 150,000 + 125,000
                        = 275,000

Calculate the expected value EV of the total cost as follows:

EV = 180,000(10%) + 205,000(60%) + 275,000(30%)
EV = 180,000(0.10) + 205,000(0.60) + 275,000(0.30)
EV = 18,000 + 123,000 + 82,500
EV = 223,500

The expected value of the total cost is $223,500.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.