The manager of a small firm is considering whether to produce a new product that
ID: 454285 • Letter: T
Question
The manager of a small firm is considering whether to produce a new product that would require leasing some special equipment at a cost of $20,000 per month. In addition to this leasing cost, a production cost of $10 would be incurred for each unit of the product produced. Each unit sold would generate $20 in revenue.
Develop a mathematical expression for the monthly profit that would be generated by this product in terms of the number of units produced and sold per month. Then determine how large this number needs to be each month to make it profitable to produce the product.
What would the following be:
1. Unit Revenue
2. Fixed Cost
3. Marginal Cost
4. Sales Forcast
5. Production Quality
6. Total Revenue
7. Total Fixed Cost
8. Total Variable Cost
9. Profit (Loss)
Explanation / Answer
Let the no. of units be x
Profit = Revenue - (Fixed Cost + Variable cost)
= 20x - 20,000 - 10x
20000 = 20x - 10x
x = 20000 / 10
x = 2000
1) Unit Revenue = 2000
2) Fixed Cost = $20,000
3) Marginal Cost = Total Cost
= (20,000 + 10 x 2000) / 2000
= 40,000 / 2000
= $20
4) Sales Forecast = 2,000
5) Production quality depends upon the machines used and the techniques adopted by company. The technique includes the TQM, Lean manufacturing, etc
6) Total Revenue = 20 x 2000
= $40,000
7) Total Fixed cost = $20,000
8) Total Variable Cost = 10 x 2000
= $20,000
Profit = Revenue - Total cost
= 40,000 - 40000
= 0
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