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Managerial Economics, Profits and Various Costs Calculations

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1. ABC Corp. owns a piece of land and building a few miles from its headquarters. The land originally cost ABC $500,000 to purchase. ABC is considering using the facility for a new training program. It could also rent a building about the same distance from its headquarters for $20,000 a year. A developer has offered ABC $2.5 million for its property. What factors should ABC consider when deciding whether or not to use its own facility or to sell it and rent the other building? What would you recommend?

2. You have worked as a real estate agent for 10 years and are earning about $100,000 per year with your current agency. You prepared the following information to use in evaluating the financial feasibility of starting your own agency:
Revenues generated during the first year of operations: $1.5 million
Salaries and other labor costs paid to employees during the first year of operations: $1 million
Operating expenses (e.g., rent, communications: $150,000
Equipment purchases: $100,000 with a 5 year straight line depreciation

You need $100,000 in equity, which you can withdraw from your bank account that is currently paying 2% per year in interest, and a $400,000 loan with a 15% interest rate.

a. What is your expected pretax accounting profit from your proposed agency?
b. What is your expected pretax economic profit from your proposed agency?
c. Identify the explicit versus implicit costs.

3. Complete the following table using your understanding of the relationship among the various costs.

0 125 0
10 5.0
20 3.5
30 235
40 130
50 5.5
60 3.0
70 350
80 7.0

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Solution Preview

1. First of all, we should realize that the 500k purchasing cost is a sunk cost (it never comes back regardless of the decision made today), so it should be ignored in the decision making process.

Things to consider

- what is the maintenance cost associated with using the building as a training facility? If the cost is high, it's probably a good idea to sell it a rent a training site instead.

- what is the interest rate? If interest rate is really high, then ABC can sell the building for 2.5mil and invest that money.

I would recommend selling the building because with 2.5mil cash, all ABC has to achieve is a 0.8% return per year to ...

See Also This Related BrainMass Solution

Managerial Economics: Price/Output Determination, Firm Supply, Markup on Cost, point price elasticity of demand, Incremental Analysis, Costs of Regulation, optimal price, output, and profit levels,
Common Electric Products, Rainbo Luncheon Deli, Appalachian Coal Company,

1. Price/Output Determination. The City of Ithaca, New York is considering two proposals to provide its city government the service of computer maintenance. First, a national computer maintenance and sales franchise has offered to purchase the city's computer equipment at an attractive price in return for an exclusive franchise on computer maintenance. A second proposal would allow several small companies to provide the service without any exclusive franchise agreement or competitive restrictions. Under this plan, individual companies would bid for the right to provide service in a given department. The city would then allocate business to the lowest bidder.

The city has conducted a survey of its department to estimate the amount they would be willing to pay for various amounts of computer maintenance. The city has also estimated the total cost of service per department. Service costs are expected to be the same whether or not an exclusive franchise is granted.

A. Use the indicated price and cost data to complete the following table.

Hours of
per Month




0 $75.00 $ 0 --
1 72.50 $50.00
2 70.00 50.00
3 67.50 50.00
4 65.00 50.00
5 62.50 50.00
6 60.00 50.00
7 57.50 50.00
8 55.00 50.00
9 52.50 50.00
10 50.00 50.00
2. Firm Supply. Common Electric Products, Inc., and Lighthouse Manufacturing, Inc., are domestic suppliers of halogen gas light bulbs used in roadside lamps. Given the vigor of domestic and foreign competition, P = MR in this market. Marginal cost relations for each firm are:

MCC = $15 + $0.0005QC (Common Electric Products, Inc).

MCL = $45 + $0.000125QL (Lighthouse Manufacturing, Inc).

where Q is output in units, and MC > AVC for each firm.

A. What is the minimum price necessary in order for each firm to supply output?

3. Markup on Cost. Oil-n-Go, Inc., offers automobile oil changes at a number of outlets in the greater Ann Arbor area. The company recently initiated a policy of matching the lowest advertised competitor price. As a result, Oil-n-Go has been forced to reduce the average price for oil changes by 5%, but has enjoyed a 15% increase in customer traffic. Meanwhile, marginal costs have held steady at $20 per oil change.

A. Calculate the point price elasticity of demand for oil changes.

B. Calculate Oil-n-Go's optimal price and markup on cost.

4. Incremental Analysis. The Rainbo Luncheon Deli is considering offering a homestyle dinner menu from 6:00 to 10:00 P.M. on weekends. Currently, the deli only operates Monday through Friday between the hours of 10:00 A.M. and 4:00 P.M. At an average price of $14 per diner, the deli's manager projects that 100 diners per evening would take advantage of the new service. Projected costs for each night the deli is open are:

Cost Category Costs
(per hour)
Four waitresses' and busboy's salaries (each $10
Two cooks salaries (each) 20
Variable overhead (electricity, heat) 30
Allocated fixed overhead (lease expenses, insurance, etc.) 80

A. Would the new weekend service be profitable?

B. Calculate the breakeven price per dinner for evening dining at a projected attendance of 100 dinners.

5. Costs of Regulation. The Appalachian Coal Company sells coal to electric utilities in the southeast. Unfortunately, Appalachian's coal has high particulate content and, therefore, the company is adversely affected by state and local regulations governing smoke and dust emissions at its customer's electricity-generating plants. Appalachian's total cost and marginal cost relations are:

TC = $250,000 + $5Q + $0.0002Q2

MC = TC/Q = $5 + $0.0004Q

where Q is tons of coal produced per month and TC includes a normal rate of return on investment.

A. Calculate Appalachian's profit at the profit-maximizing activity level if prices in the industry are stable at $25 per ton, and therefore P = MR = $25.

B. Calculate Appalachian's optimal price, output, and profit levels if a new state regulation results in a $300,000 fixed cost increase that cannot be passed onto customers.

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