ses/1958651/quizzes/3470873/take C Arvest Central Mort Mal, ame5613eps Question
ID: 388936 • Letter: S
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ses/1958651/quizzes/3470873/take C Arvest Central Mort Mal, ame5613eps Question 14 5 pts An entrepreneur identifies a product that she knows will sell like crazy if she can only figure out a way to bring it to her area. The idea is so fantastic that can't tell you what it is, so we will just refer to it as X. The entrepreneur has identified four ways to bring X to the masses; she can import it, she can smuggle it, she can try to produce it on her own, and she can have a local reputable producer make it for her. The fixed and variable costs for each of these alternatives are shown below. What is her best course of action if she believes the demand will be 55,000 units? Import Produce Smuggle Outsource ixed Cost 0 $500.000 $200,000$o $37 Cost $30 $10 $15 Import Smuggle Produce Outsource DeiExplanation / Answer
It is to be noted that :
Total cost = Fixed cost + Variable cost / unit x Number of units
Since demand = 55000 units , number of units = 55000
Therefore,
Total cost = Fixed cost + 55,000 x Variable cost
The best course of action will be the one which will have the least Total cost .
Therefore,
Total cost of import = 0 + 30 x 55000 = $1650,000
Total cost of Produce = $500,000 + 10 x 55000 = $500,000 + $550,000 = $600,000
Total cost of smuggle = $200,000 + $15 x 55,000 = $200,000 + $825,000 = $1025,000
Total cost of Outsource = 0 + 37 x 55000 = $2035,000
Minimum cost is incurred for option “Produce”
Best course of action is to “Produce”
Best course of action is to “Produce”
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