Question

Production quantity: 4200 units
Total labor fee: $ 12600
Ingredients: $ 21,000
Fixed cost: $ 7000
Total: $ 42,700
Unit selling price: $ 15.

This business:
a) Calculate the marginal cost?
b) Calculate your marginal income?
c) According to the marginal cost method, the price is $ but if it does not, calculate the total income?
This business wants to open up to X market abroad. Information about the X market is as follows.

Production quantity for X market: 800 units
Unit sales price for market X: $ 10
25 cent shipping cost per unit for market X
For the X market, the additional fixed cost that should be covered is $ 0.
In line with this information;
d) Calculate the marginal cost for market X?
e) Calculate marginal revenue for market X?
f) Calculate the total income in the case of no pricing for the market X according to the marginal cost method?
g) Should this business be opened to this X market abroad, based on your findings? Why is that?

Answer 1

a) Total Fixed Cost = $7000

Total Variable Cost = Total Cost - Total Fixed Cost = 42700 - 7000 = $35700

No. of Units produced = 4200

Variable cost per unit = 35700 / 4200 = $8.5

So to produce one additional unit, the fixed cost will not be changed. So the additional cost to produce 1 additional unit = Variable cost of the unit = $8.5

So the marginal cost of the product = $8.5

b) Marginal Income = Additional income from selling one additional unit = Price of the Unit = $15
So the marginal income is $15

c) The total income = 4200 * 15 = $63000

The net profit earned by the firm = $63000 - $42700 = $20300

d) For market X, the marginal cost will be the sum of the variable cost + Variable shipping cost per unit = $8.5 + $0.25 = $8.75

So the Marginal cost for Market X is $8.75

e) Marginal Revenue for Market X = Price at market X = $10

So in market X the marginal revenue for the product is $10

f) Total Income from market X = 800*10 = $8000

The net additional profit earned from market X = $8000 - $8.75*800 = $1000

However, if we consider the fact that the fixed cost is divided among the domestic market and the new Market X, then component for Fixed cost for Market X = 800 / (4200+800) * 7000 = 1120

So Net Income from market X = $1000 - $1120 = -$120

g) Yes, the market should be opened. Even though the total profit shows negative, but here this market is taking a load of the domestic market fixed cost. The profit of the domestic market increases by $1120.

Since the fixed cost is constant, so irrespective of markets, that will be incurred. The domestic market, without any new market, is able to absorb the fixed costs and make a profit. So to develop any new market, what needs to be seen is whether the Marginal Cost or variable cost is covered. In this case, the price or marginal revenue is higher than the Variable cost or Marginal Cost per unit. So every additional unit brings in more profits or rather brings in more contribution. So Market X should be opened.

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