A monopolistic firm operates in the U.S. No trade is possible between the NY market and the LA market. The firm has calculated the demand functions for each market as follows:
NY Market Pn = 150 - Qn
LA Market Pl = 50 - Ql
The company estimates its total cost function to be: TC = 40Q.
Calculate the following:
a. quantity, total revenue and profit when the company maximizes its profit and charges the same price in both markets.
b. quantity, total revenue and profit when the company charges different prices in each market and maximizes its total profit.
a) To find the joint demand function, first rearrange the separate demand functions:
Pn = 150 - Qn
Pl = 50 - Ql
Qn = 150 - Pn
Ql = 50 - Pl
Add the demand functions:
Qtotal = 150 - Pn + 50 - Pl
Q = 200 - Pn - Pl
Pn = Pl, so:
Q = 200 - 2P
2P = 200 - Q
So the joint demand function is:
P = 100 - Q/2
The firm maximizes its profit when Marginal Revenue ...
Given the demand functions that a firm faces in the New York and Los Angeles markets, this firm shows how to calculate the firm's maximum profit when it charges the same price in both markets, and when it charges different prices in each market.
Cost-Volume-Profit Analysis and Pricing Decisions
1 ) Assume that NBD firm's bicycle has fixed costs of $101,250. Each unit generates variable costs of $80 and sells for $125.00. What is the break-even point?
2) The following are production and cost data for two products, X and Y.
Product X Product Y
Contribution margin per unit $450 $280
Machine set-ups needed per unit 25 14
The company can only perform 14,000 set-ups each period yet there is unlimited demand for each product. What is the maximum contribution margin for the year?
3) Glendale Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data:
Wages and Salaries 314,000
Resources are consumed as follows:
Activity Cost Pools
Assembly Setting Up Other Total
Depreciation 30% 20% 50% 100%
Utilities 20% 40% 40% 100%
Wages and salaries 40% 45% 15% 100%
How much total cost would be allocated to the Assembly cost pool?
4) Koreen Manufacturing Co. has three production departments. Koreen allocates maintenance costs to the departments based on their use of machine hours. The maintenance cost for March was $180,000. The departments useage of labour and machine hours in March were:
Department Machine hours Labor hours
A 500 3,000
B 500 5,000
C 800 2,000
How much maintenance cost should be allocated to the department B for March?
5) Santa Company has $27 per unit in variable costs and $1,000,000 per year in fixed costs. Demand is estimated to be 100,000 units annually. What is the price if a markup of 40% on total cost is used to determine the price?
6) Sanai manufacturing company produces and sells 40,000 units of a single product. Variable costs total $80,000 and fixed costs total $120,000. If each unit is sold for $8, what markup percentage is the company using?
7) A General Motors executive is considering how to price the 2013 Chevy Volt electric car in order to maximize profits for the company. Manufacturing each Volt involves $9,500 of materials, $12,500 of labor, $3,800 of shipping, and $4,000 of other supplies. The Detroit facility where the Volt is manufactured has $12.5 million of fixed costs. The marketing department says that adding a Bose sound system would boost demand, but it would cost an additional $750 per unit.
The quantity demanded at each per unit price is as follows:
Price (No Bose) (With Bose)
$29,000 14,000 16,800
$30,000 11,200 13,440
$31,000 8,960 10,752
$32,000 7,168 8,602
$33,000 5,734 6,881
$34,000 4,588 5,505
$35,000 3,670 4,404
$36,000 2,936 3,523
$37,000 2,349 2,819
$38,000 1,879 2,255
$39,000 1,503 1,804
$40,000 1,203 1,443
What profit-maximizing strategy should she choose?
A) $34,000 price without Bose sound system.
B) $40,000 price with Bose sound system.
C) $35,000 price with Bose sound system.
D) $32,000 price without Bose sound system.
8) Sarker manufacturing company produces and sells 40,000 units of a single product. Variable costs total $80,000 and fixed costs total $120,000. If each unit is sold for $8, what markup percentage is the company using?
9) Troto company has total fixed costs of $6,000,000 and total variable cost of $3,000,000 at a volume level of 300,000 units. What price would be charged if the company used cost plus pricing and a markup of 30%?
10) The Mermaid Company sells one product with a variable cost of $5 per unit. The company is unsure what price to charge in order to maximize profits. The price charged will also affect the demand. If fixed costs are $100,000 and the following chart represents the demand at various prices, what price should be charged in order to maximize profits?
Units Sold Price