Module 2: Cost Concepts & Design

Economics
 Example 1
2

FESTO manufactures solenoids widely used in automation equipment. In

order to set up the manufacturing plant, the company estimated the monthly
fixed costs due to capital recovery and machinery to be RM75,000 and
variable costs estimated at RM75 per unit. The selling price per unit is
dependent on demand and estimated to be reduced when more units are
being produced as given by p = 300 – 0.05D, where D is the
demand/production rate
a) If the production rate (assumed to be equal to demand D) is 2,500 units
per month, determine the company’s profits.
b) Determine the optimal production rate (assumed to be equal to demand
D) to maximize profit.
c) Determine the range of production within which the operation is still
profitable
 Example 1
3

   (a)

 
At D = 2,500

 
 Example 1
   
(b)
 
units
 
   
(c)
 
3
 

 
 Example 2
5

CIGGU manufactures leather handbags for export market. The company is

considering a project to install a new machine with estimated daily fixed
costs due to capital recovery and machinery to be RM2,000 and variable
costs estimated at RM35 per unit. The selling price per unit, p, is dependent
on demand, D, as given in the equation

 𝑝=5+ 4,800 − 3,000

𝐷 2
𝐷

a) If the production rate (assumed to be equal to demand D) is 25 units per

day, determine the company’s profits.
b) Determine the optimal production rate (assumed to be equal to demand
D) to maximize profit.
c) Determine the range of production within which the operation is still
profitable.
 Example 2
  (a)

 
At D = 25

 
 Example 2
   
(b)
 

   (c)
 

 
 
 
 Example 3

A company produces and sells a consumer product and is able to control the
demand for the product by varying the selling price. The approximate relationship
between price and demand is
 𝑝=𝑅𝑀 38+ 2,700 = 5,000
𝐷 𝐷
2

a) Determine the number of units that should be produced and sold each month
to maximize profit.

b) What is the economic breakeven level of production?

Example 3
9
 Example 4

Ramli Burger factory operation has fixed costs of RM70,000 per month and it can
produce up to 15,000 burger packets per month. Each packet sells for RM10 in
the market while the manufacturer faces variable costs of RM3 per packet.

a) What is the economic breakeven level of production?.

b) Calculate the manufacturer’s monthly profits at full capacity.

c) What would happen to the monthly profits if another burger manufacturer

entered the market, driving the sale price of burger down to RM7 per packet?
 Example 4

(a)
Total Cost, CT = RM70,000 + 3D
Total Revenue, RT = 10D
Breakeven when CT = RT
10D = RM70,000 + 3D
D = 10,000 packets

(b)
Monthly Profit = RT – C T
= 10D – (RM70,000 + 3D)
@ D = 15,000
Monthly Profit = 10(15,000) – [RM70,000 + 3(15,000)] = RM35,000
 Example 4
12

(c)
@ p = RM7,
Monthly Profit = [7(15,000) – (RM70,000 + 3(15,000)] = -RM10,000 (Loss)
 
Example
13
Example
14