Concepts: Variable cost Fixed cost Total cost Average total cost Marginal cost T
ID: 2582852 • Letter: C
Question
Concepts: Variable cost Fixed cost Total cost Average total cost Marginal cost
Total revenue Average revenue Marginal revenue Demand Curve
1. Mark Sampson, President of Sampson Switch Company must consider the pricing and production for the Ultra Switch Model B, one of the company’s top selling models. Switch production includes grinding and assembly of finished components. Marketing efforts consist primarily of print ads in trade publications. Last year the Model B produced a profit of $8,000.
Production facts. Sampson hires part time workers on an “as needed” basis to do the grinding task. On average, a grinder is paid $8.00 per hour and s/he is expected to produce 200 switch plates per each 8-hour day. Switch assemblers, also part-time workers, are paid $50 per day and they are expected to assemble 5 switches per hour. Each switch consists of two switch plates and assorted other components (the cost of the “other components” is $3.11 per switch).
Fixed Costs. Other costs include the year-long contract for the rental of the assembly line equipment ($1,000 per month).
Marketing facts. According to next year’s plan, Mark expects to place 10 black and white print ads (each $500) and two special feature, color ads (each $2,500) for the Model B. Salaries for the marketing sales force that are allocated to the Model B will total $18,000 next year.
1a. What is the cost to produce one switch? (i.e., the unit variable cost)?
1b. What and how much are the items composing the total “fixed” costs for next year?
1c. Graph the relationship between quantity produced (on the X-axis) and Total Cost (on the Y-axis).
1d. How much is the per-unit contribution if the product is priced at $15 a unit?
1e. What was the profit last year? What will be the change in profitability for the Model B if the product is priced at $15 per unit and 2,500 units are sold?
1f. What is the breakeven point if the product is priced at $15? How many must be sold next year in order to produce the same profit level as last year?
1g. Assume that Mark has $50,000 in equity invested in the Model B line. How many units must be sold in order to return 25% on his equity?
2. Answer qs 1a-g assuming that the selling price is reduced to $10 and demand increases by a factor of four.
3. After much investigation, the marketing research department tells Mark that they expect the “demand curve” to be. Compare the expected demand with the breakeven point for each price point. Knowing this information, what price should Mark charge in order to maximize profits on the Model B ?
2,500
4a. Create a graph showing “Quantity Demanded” on the X-axis and “Total Revenue $” on the Y-axis for each of the five price–quantity demanded points listed in q 3 above.
4b. Create a graph that superimposes the Total Revenue for the five points of the “Demand Curve” on the “Breakeven” Chart of the Model B (note the $$ Y -axis will represent Total Revenue for the Demand curve and will represent Total Cost for the Breakeven chart). { 01.81 gif k&b785 g pees ]
selling price units demanded break even point $152,500
... $10 10,000 ... $9 13,000 .... $8 14,000 ..... $7 15,000 .....Explanation / Answer
Dear Student first we need to split give cost into variable and fixed VARIABLE COSTS PER UNIT FIXED COSTS TOTAL PART TIME WORKER COST: ASSEMBLY LINE EQUIPMENT RENTAL CHARGES = 10000*12 12000 GRINDING TASK = 8*8/200 *2 0.64 MARKETING SWITCH ASSEMBLERS = 50/5*8 1.25 BLACK AND WHITE PRINT ADS =10*500 5000 OTHER COMPONENTS COST 3.11 SPECIAL COLOUR ADS =2*2500 5000 SALARIES 18000 TOTAL VARIABLE COST PER UNIT 5 TOTAL FIXED COST 40000 1a. variable cost = 5 1b fixed cost = 40000 1d. Contribution = sales - variable cost = 15-5 = 10 1e. Last year profit is 8000 given in the problem Profit if 2500 units sold contribution = 2500*10 25000 Less : fixed cost 40000 Loss -15000 If 2500 units sold with the selling price of 15 it become loss to company 1f Break even point = fixed cost / contribution per unit = 40000/5 = 8000 units Break even point for the same profit level = fixed cost+ last year profit / contribution per unit = (40000+8000)/5 = 9600 units 1g Expected return = 50000*25/100 = 12,500 Expected sales = fixed cost+ expected return / contribution per unit = 40000+12500/5 12500 = 12,500 units 3 SELLING PRICE CONTRIBUTION UNITS DEMAND BEP 15 5 2500 500 10 0 10000 9 -1 13000 -13000 8 -2 14000 -7000 7 -3 15000 -5000 If selling price less than 10 is not feasable to continue the business
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.