Tesla needs to take pricing and production decisions for the budgeting period 4.

Question

Tesla needs to take pricing and production decisions for the budgeting period 4. Use the Table below to answer the questions. The average unit costs and annual production volumes for the Lithium-ion battery used in the Model T are given in the table below. Tesla has been able to reduce its costs through experience effect in the past. Period Production 144,000 147,000 164,000 185,000 Unit Cost $150 $140 $135 1. Estimate the reduction in cost due to experience effects if Tesla produces 185,000 units in period 4. 2. Imagine Tesla cannot meet its pricing targets with the price you computed in Q1 and decides to increase production so that experience effects will lead to higher reduction in costs. How many units would they need to produce in Period 4 for the cost to fall to $128?

Explanation / Answer

1 . Estimate reduction in cost due to experience if tesla produces 185000 units in period 4 then the unit cost of that will be $130.10

2 . TESLA will produce 195500 units in period 4 for the cost of $128

as the Fixed cost Calculated is 7090545 + Variable cost per unit is 91.765 * 195500 = 25030602.5 / 195500 = $128.033.

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