Redstone Clayworks, Inc. is located in Sedona, Arizona and manufactures clay fir
ID: 1212632 • Letter: R
Question
Redstone Clayworks, Inc. is located in Sedona, Arizona and manufactures clay fire pits for patios. They are one of about two dozen firms around the world that manufacture and sell clay fire pits for retailers such as Home Depot, Lowe’s, Front Gate, and other upscale home product chains. There is virtually no product differentiation. A clay fire pit is a clay fire pit.
The spreadsheet below gives some of Redstone’s production cost data. A template for the spreadsheet is provided in the Course Materials. You may download my template or create your own. Add columns to show, respectively, average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and short-run marginal cost (SMC).Then, add columns to show, respectively, total revenue (TR), marginal revenue (MR), total profit, average profit, and profit margin.
Assume that the world market demand and supply curves for clay fire pots intersects at $190 per unit.
Q
TC
TFC
TVC
0
7,000
7,000
-
100
14,000
7,000
7,000
200
23,000
7,000
16,000
300
32,000
7,000
25,000
400
43,000
7,000
36,000
500
52,000
7,000
45,000
600
74,000
7,000
67,000
700
97,000
7,000
90,000
800
111,000
7,000
104,000
900
132,000
7,000
125,000
1000
152,000
7,000
145,000
1. If Redstone wanted to minimize average total cost, how many units would it produce?
2. If Redstone wishes to maximize profit MARGIN, how many units should it produce?
3. What level of output should the manager of Redstone choose to produce? Explain your choice in 50-100 words.
4. Make a copy of your spreadsheet and triple the fixed costs to 21,000. How does this change your answer to question 3? Explain your result in 50-100 words.
5. Suppose that fire pits fall out of fashion and prices fall worldwide to $95. How many units should the manager choose to produce? Explain your answer in 50-100 words.
Q
TC
TFC
TVC
0
7,000
7,000
-
100
14,000
7,000
7,000
200
23,000
7,000
16,000
300
32,000
7,000
25,000
400
43,000
7,000
36,000
500
52,000
7,000
45,000
600
74,000
7,000
67,000
700
97,000
7,000
90,000
800
111,000
7,000
104,000
900
132,000
7,000
125,000
1000
152,000
7,000
145,000
Explanation / Answer
1) Minimum ATC from table is when 500 units are produced
2) Maximum profit margin is at 500 units from the table
3) The manager of Redstone should produce the quantity which gives the maximum profit as profit maximizarion is the goal of all profit seeking organizations. So in this case we see that the profit is maximum when there are 500 units produced. This should be the production goal of the manager of Redstone.
4) The manager of Redstone should produce the quantity which gives the maximum profit as profit maximizarion is the goal of all profit seeking organizations. Now from the table we see that the profit is still maximum at 500 unit of output so though the fixed cost has change but previous answer does not change.
Q TC TFC TVC ATC=TC/Q Price P Revenue R=P*Q Profit = R-P AFC=FC/Q AVC=VC/Q MC MR Average Profit = Profit/Q Profit Margin = Profit/R*100 0 7,000 7,000 - 100 14,000 7,000 7,000 140.0 190 19000 5,000 70 70 7000 19000 50 26.3 200 23,000 7,000 16,000 115.0 190 38000 15,000 35 80 9000 19000 75 39.5 300 32,000 7,000 25,000 106.7 190 57000 25,000 23 83 9000 19000 83 43.9 400 43,000 7,000 36,000 107.5 190 76000 33,000 18 90 11000 19000 83 43.4 500 52,000 7,000 45,000 104.0 190 95000 43,000 14 90 9000 19000 86 45.3 600 74,000 7,000 67,000 123.3 190 114000 40,000 12 112 22000 19000 67 35.1 700 97,000 7,000 90,000 138.6 190 133000 36,000 10 129 23000 19000 51 27.1 800 111,000 7,000 104,000 138.8 190 152000 41,000 9 130 14000 19000 51 27.0 900 132,000 7,000 125,000 146.7 190 171000 39,000 8 139 21000 19000 43 22.8 1000 152,000 7,000 145,000 152.0 190 190000 38,000 7 145 20000 19000 38 20.0Related Questions
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