MGMT 3100 Chapter 4 Exercise

1. Assume a fixed cost of $900, a variable cost of $4.50, and a selling price of $5.50.
A. What is the break-even point?
TR=TC 900+4.5Q=5.5Q
TC=900+4.5Q 900=Q Break Even Quantity
TR=5.5Q $4,950 Break Even Point

B. How many units must be sold to make a profit of $600.00?

TR+TC=pi 600=5.5Q-(900+4.5Q)
600=Q-900
1500=Q
C. How many units must be sold to average $0.25 profit per unit? $0.50 profit per unit?
pi/Q=.25 pi/Q=.50
pi/Q=(Q-900)/Q pi/Q=(Q-900)/Q
.25=1-900/Q .50=1-900/Q
.75=900/Q .50=900/Q
Q=900/.75 Q=900/.50
Q=1200 Q=1800

2. A firm is considering whether to produce the parts for one of its product or to buy them from a supplier. If the firm decided to make the parts, the annual cost is
$50,000 and the variable cost per part is $80. However, if the firm purchased the parts from its supplier, the cost is $120 each.

a. Using this information, find the best decision if the demand is 2,000 parts.
TC=50000+80Q TC=120Q
TC=210000 TC=240000
Its better to make them instead of purchasing them
b. Determine the break-even quantity at which the firm would be indifferent between manufacturing the part in-house and outsourcing it.
50000+80Q=120Q
50000=40Q
1250=Q
c. If demand is forecast to be 1,000 parts, should the firm make the part in-house or purchase it from a supplier? Why?
Supplier! 1000 is less than 1250, which means it's on the supplier side of break-even
d. The marketing department forecasts that the upcoming year’s demand will be 2200 parts. A new supplier offers to make the parts for $100 each. Should the
company accept the offer? Show your work to make your argument.
TC=100Q our new break-even point is 2500, and anything less than that means we should go with supplier
100Q=50000+80Q
20Q=50000
Q=2500
e. What is the maximum price per part the manufacturer should be willing to pay to the supplier if the forecast demand for the part is 3,000?
TC=50000+80Q
TC=290000
TC/Q=$97 per unit