Answered: At a recent board meeting, the…

At a recent board meeting, the president and CEO got into a heated argument about whether to shut down the firm's plant in Miami. The Miami plant currently loses $60,000 monthly.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter14: Pricing Techniques And Analysis

Section: Chapter Questions

Problem 7E

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Royersford Knitting Mills, Ltd., sells a line of women’s knit underwear. The firm now sells about 20,000 pairs a year at an average price of $20 each. Fixed costs amount to $120,000, and total variable costs equal $240,000. The production department has estimated that a 10 percent increase in output would not affect fixed costs but would reduce average variable cost by 40 cents. The marketing department advocates a price reduction of 5 percent to increase sales, total revenues, and profits. The arc elasticity of demand with respect to prices is estimated at −2. The proposal to cut prices by 5 percent would total revenues from $400,000 to . Total costs would be and total profits would be . If average variable costs are assumed to remain constant over a 10 percent increase in output, total profits after a 5 percent price cut would be .
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Royersford Knitting Mills, Ltd. sells a line of women’s knit underwear. The firm now sells about 20,000 pairs a year at an average price of $10 each. Fixed costs $60,000, and total variable costs equal $120,000. The production department has estimated that a 10 percent increase in output would not affect fixed costs but would reduce average variable cost by 40 cents. The marketing department advocates a price reduction of 5 percent to increase sales, total revenues, and profits. The arc elasticity of demand is estimated at -2. Evaluate the impact of the proposal to cut prices on (1) total revenue, (2) total cost, and (3) total profits. If average variable costs are assumed to remain constant over a 10 percent increase in output, evaluate the effects of the proposed price cut on total profits.
Charles Lackey operates a bakery in Idaho Falls, Idaho. Because of its excellent product and excellent location, demand has increased by 45% in the last year. On far too many occasions, customers have not been able to purchase the bread of their choice. Because of the size of the store, no new ovens can be added. At a staff meeting, one employee suggested ways to load the ovens differently so that more loaves of bread can be baked at one time. This new process will require that the ovens be loaded by hand, requiring additional manpower. This is the only production change that will be made in order to meet the increased demand.The bakery currently makes1,800 loaves per month. Employees are paid $8 per hour. In addition to the labor cost, Charles also has a constant utility cost per month of $650 and a per loaf ingredient cost of$0.40. Part 2 what is the Current multifactor productivity for 640 work hours per month = loaves/dollar (round your response to three decimal…
Red Owl Stores told the Hoffman family that, upon the payment of approximately $518,000, a grocery store franchise would be built for them in a new location. Upon the advice of Red Owl, the Hoffmans bought a small grocery store in their hometown in order to get management experience. After the Hoffmans operated at a profit for three months, Red Owl advised them to sell the small grocery, assuring them that Red Owl would find them a larger store elsewhere. Although selling at that point would cost them much profit, the Hoffmans followed Red Owl’s directions. In addition, to raise the money required for the deal, the Hoffmans sold their bakery business in their hometown. The Hoffmans also sold their house, and moved to a new home in the city where their new store was to be located. Red Owl then informed the Hoffmans that it would take $624,100, not $518,000, to complete the deal. The family scrambled to find the additional funds. However, when told by Red Owl that it would now cost them…
Knitting Mills sells a line of women’s knit underwear. The firm now sells about 20,000 pairs a year at an average price of $10 each. Fixed costs $60,000, and total variable costs equal $120,000. The production department has estimated that a 10 percent increase in output would not affect fixed costs but would reduce average variable cost by 40 cents. The marketing department advocates a price reduction of 5 percent to increase sales, total revenues, and profits. The arc elasticity of demand is estimated at -2. i. Evaluate the impact of the proposal to cut prices on (1) total revenue, (2) total cost, and (3) total profits. ii. If average variable costs are assumed to remain constant over a 10 percent increase in output, evaluate the effects of the proposed price cut on total profits.