A particular machine in your factory is used to make two products, X and Y. Each

Question

A particular machine in your factory is used to make two products, X and Y. Each day, the machine can process a maximum of 40 batches. A single batch of X is 100 units. X sells for $10 per unit (and we can sell an unlimited amount at that price) with a variable cost of $4 per unit and a daily fixed cost of $5,000. A single batch of Y is 50 units. The variable cost of Y is $7 per unit, with a daily fixed cost of $6,000.

a) Based on the production of X, what is the shadow cost of one batch produced by the machine?

b) What is the minimum price we need to charge for a unit of Y so that its contribution margin is not negative? (Take opportunity cost into account.)

c) Assume that we are capable of selling 800 units of Y each day for $25 each. Further assume that 75% of the fixed cost of Y could be avoided if we dropped the product. What is the daily differential profit of dropping Y production?

d) Assume instead that Y has a downward sloping demand curve with V = 6,000 – 200P. Determine the optimal price to charge for Y to maximize total factory profits.

Explanation / Answer

Ans:

a) As per the given information machine can produce 40 batches each batch consists of 100 units which implies production of X is 40*100=4000units.

Shadow cost of X is as follows

Variable Cost = 4000*4= 16000

Fixed Cost= 5000

Total cost = 21000

cost per unit= 21000/4000= $5.25

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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