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Profit Maximization

Allied Box offers mail-order storage containers for fine china producers. The company is the low-cost provider of these boxes with fixed cost of $480,000 per year, plus variable cost of $30.00 for each box. Annual demand and marginal revenue functions for the company are:
P = $70 - $0.0005Q
MR = dTR/dQ = $70 - $0.001Q

A.- Calculate the profit-maximizing activity level.
B.- Calculate the company's optimal profit and return on sales levels.
C.- What would you do if you found that your profit margins were too low and your position as a cost leader were threatened?.

Solution Preview

A. Profit Maximization occurs when Marginal Cost equals Marginal Revenue
Marginal Cost = $30.00 per box
70 - .001Q = 30
=> 40 = .001Q
=> 40,000 = Q

B.
Revenue at this level = 70*40,000 - ...

Solution Summary

The solution goes into a great amount of detail regarding the question being asked. Step by step explanation is provided for each part of the question which makes it very easy to follow along for anyone with just a basic understanding of the concepts. Overall, an excellent response to the question being asked.

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