Q7.

The least-cost input is necessary for profit minimization as it ensure the minimum cost of
production. However, it assumes that all output is sold/demanded to generate the maximum
profit. Thus, it is not necessarily the case that the least-cost input produces the highest profit.
We would need to consider the optimal level of output which is related to the demand.

Q8.2 Alternative Breakeven output, per month

Single plant Q= 262500/(5-3.25) = 150,000
The
Muncie Q= 120000/(5-3) = 60,000
Normal Q= 110000/(5-3) = 55,000
Illinois Q= 950000/(5-3) = 47,500
Sum = 60000+55000+47500=162,000
opportunity cost of continuing to drive the jeep is $9500 because if you sold the jeep you
would have gotten the $9500. Also, since the loan is interest free, the opportunity cost is still
$9500.

The risk that the lender is exposed to is the default risk. Since the financing is free of interest,
it is possible that more people take a loan and are not able to repay their loan.

Q8.3

The marginal cost of running an extra flight is $15000. Incremental cost is the cost associated
with a managerial decision. Thus, the incremental cost is 60 times $15000 = $900,000.
Incremental cost is more relevant for decision making in this case. The management needs to
estimate whether revenues for the 60 flight trial exceeds $900,000

P8.8 Multiplant Operation

A. Breakeven

Revenue = Cost
P*Q = FC + VC

Alternative Breakeven output, per month

Indiana Q= 262500/(5-3.25) = 150,000

Muncie Q= 120000/(5-3) = 60,000

Normal Q= 110000/(5-3) = 55,000
Illinois Q= 950000/(5-3) = 47,500
Sum = 60000+55000+47500=162,000

Assuming there are no transportation cost and all goods are sold.
 B.
Alternative Projected Sales Profit = TR – (TFV + TVC), $
Indiana 200000 = 200,000*5 –
(262500+3.25*200000) = 87,500

Muncie 80000 = 80000*5 – (120000+3*80000) =

40000
Normal 70000 = 70000*5 – (110000+3*70000) =
30,000
Illinois 50000 = 50000*5 – (95000+3*50000) =
5000
Sum = 40000+30000+5000 = $75000

Alternative one is preferable because of higher profits.

C. Full Capacity
Alternative Full capacity Profit = TR – (TFV + TVC), $
Indiana 300,000 = 300,000*5 –
(262500+3.25*300000) = 262,500

Muncie 120,000 = 120000*5 – (120000+3*120000) =

120,000
Normal 100,000 = 100000*5 – (110000+3*100000) =
90,000
Illinois 80000 = 80000*5 – (95000+3*80000) =
65,000
Sum = 120000+90000+65000 = $275,000

Alternative 2 generates more profit.