Question

In consultation with members of the economics department at a local college the marketing department has been able to gain some insight into the elasticity of demand for the higher quality product.

In addition, members of the faculty in the materials and logistics department were able to incorporate various economies of scale into the cost estimates. The fixed costs for different size processes as well as the variable cost information is presented with the sales information in table 1.

Table 1

Parameters for Alternative Sales Volumes (Process 1 only)

Option Number	Selling Price	Sales Volume	Fixed Cost	Variable Cost/unit
1	$25	30,000	$60,000	$16.5
2	22	40,000	90,000	15
3	18	60,000	100,000	14
4	15.5	80,000	150,000	13.5
5	14.5	110,000	150,000	13

A. What should Goliath do and how much money will they make if their goal is to make as much money as possible?

B. What should Goliath do and how much money will they make if their goal is to maximize their return on investment?

C. What should Goliath do and how much money will they make if their goal is maximize their market share?

Answer 1

Calcuate Total Revenue, Total Cost (Fixed + Variable) and Total Profit for each option

Total Revenue = Sales Volume * Selling price

Total cost = Fixed cost + Variable cost * Sales Volume

Profit = Total Revenue - Total Cost

Return on investment = Profit / Total cost

A) The goal here is to maximize profit. Therefore, they should choose option 1, because it gives the maximum profit ($195,000)

B) Goliath should choose option 1, as it gives the maximum return on investment

C) Goliath should choose option 5, as it gives the maximum sales volume and hence maximizes their market share