1.

a)

Basis: Weekly

Profit/Loss = Revenue – Costs

Revenue = 52000 x $0.5 = $26,000

Costs = Labor and materials + Rent and Insurance + Interest and Principals payments

= $19760 + $10000 + $4000 = $33,760

Profit/Loss= $26,000 - $33,760 = - $7760

Weekly loss = $7760

b)

Weekly costs = Labor and materials + Rent and Insurance + Interest and Principals payments

= $19760 + $10000 + $4000 = $33,760

Fixed Costs = Rent and Insurance + Interest and Principals payments

= 14,000

14000
Fixed costs portion = x 100 = 41.47%
33760
Variable Costs = Labor and Materials

= 19760

19760
Variable costs portion = x 100 = 58.53%
33760

c)

Since the variable costs make up the largest portion of the total costs, Rubber Ducky should analyze
whether it is possible to lower the costs by more than $7,760 to realize any profits. They should also
analyze if it is possible to increase revenue by more than $7,760. If they determine that it possible to
increase the revenues or decrease the costs, they should not shut down the company immediately.
However, if they determine that it is not possible, they should shut down the company.
2.

The stockholders and business analysts believe that increasing the prices will increase the demand for
the Netflix subscriptions plans. They believe that the consumers will be willing to pay more for more
streaming content. Besides, they believe that having more content will give Netflix a competitive
advantage over its competitors, which will attract more customers.

4.

Given that;

Elasticity Demand = -3.0

Sales of Potomac’s ovens before price reduction = 4,500 units

Sales of Potomac’s ovens before price reduction = 6,000 units

Potomac current selling price= $500

% Change∈Quantity
e (elasticity demand) =
% Change∈Price

% Change∈Quantity
% Change∈ Price =
e (elasticity demand)

Q 2−Q 1
% Change∈Quantity = Q 2+Q1 = 0.2857
2

0.2857
% Change∈ Price = = -0.0952
−3

P 2−P 1
% Change∈ Price = P 2+ P1 = -0.0952
2

2P2 – 2P1 = -0.0952P1 – 0.0952P2

Substituting for P1,

2P2- 1000 = -47.6 – 0.0952P2

2.0952P2 = 952.4

P2 = 454.5628

Potomac should reduce the price from $500 to $454.56 to maintain the initial sales before the price cut.

5.

a) Profit/Loss = Revenue – Cost

= 25,000 – 18,000

= $7,000

b) If he rents it, he will earn $15,000 and $5000 as income for driving a truck for a competing firm=
$20,000

Economic Profit/Loss = Current earnings – Opportunity Cost

= 7000 – 20000 = -13,000

Economic Loss = $13,000

6.

Project Required Investment Expected Return Rate Cumulative Investment

(in millions) (in millions)
A $500 23% 500
B $75 18% 575
C $50 21% 625
D $125 16% 750
E $300 14% 1050
F $150 13% 1200
G $250 19% 1450
 Cumulative fund raised
Block of funds (in millions) Cost of capital
(in millions)

First 250 14% 250

Next 250 15.5% 500

Next 200 16% 700

Next 150 16.5% 850

Next 100 18% 950

Next 100 21% 1050

Optimal capital budget occurs where marginal cost of capita equals the marginal return from investing.
Therefore, Ajax capital budget will be 750 Million.