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Kathy's Bakery is a local full-service bakery in Omaha, Nebraska. Kathy sells loaves of wheat bread for $3 a loaf. Of this amount, $1.50 is profit contribution. She is considering an attempt to differentiate her shop from several other competitors by only producing a special rice bread for customers allergic to wheat. Doing so would increase her unit cost by 50 cents per rice loaf. Current monthly profits are $400 on 800 unit sales.

A. Assuming average variable costs are constant at all output levels, what is Kathy's total cost function before the proposed change?
B. What will the total cost function be if rice loafs are produced?
C. Assume rice loaf prices remain stable at $3. What percentage increase in sales would be necessary to maintain current profit levels?

Solution Preview

A. Assuming average variable costs are constant at all output levels, what is Kathy's total cost function before the proposed change?

Price, P=$3.0
Profit contribution=$1.50
Variable Cost per unit=V=Price-profit margin=3-1.5=$1.5
Current level of profit=M=$400
Current level of ...

Solution Summary

Solution describes the steps to derive cost function of Kathy in both the cases. It also determines change in sale volume needed to maintain current level of profits.

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