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    Mark up pricing

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    The California Instruments Corporation, a producer of electronic equipment, makes pocket
    calculators in a plant that is run autonomoulsy. The plant has a capacity output of 200,000
    calculators per year, and the plant's manager regards 75 percent of capacity as the normal or standard output. The projected total variable costs for the normal or standards level of output are $900,000, while the total overhead or fixed costs are estimated tobe 120 percent of total variable costs. The plant manager wants to apply a 20 percent markup on cost.

    a) What price should the manager charge for the calculators?

    b) If the price set is the profit-maximizing price, what is the price elasticity of demand for
    calculators faced by the plant

    c) If the price elasticity of demand were 24, what would be the optimum markup on cost
    that the manager should apply?

    d) If during the year the plant manager receives an order for an additional 20,000 of its
    calculators froma school system to be delivered in four months for the price
    of $10, should the manager accept the order?

    e) If California Instruments wants to add the pocket calculator to its own product line
    what should be the transfer price of the pocket calculators?

    f) Suppose that in the future the plant will sell pocket calculators to the marketing division
    of Cal. Instr. And ont eh external imperfectly competitive market, where the price
    elasticity fo demand is Ep = --2. What would be the net marginal revenue of the marketing division of the firm for the pocket calculators? At what price should the calculators be sold on the external market?

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    Solution Summary

    Mark up pricing is denoted.

    $2.19