Question

Kellogg’s knows that selling an additional truckload of its breakfast products would bring in an additional $43,020. The factory manager knows that producing an additional lorry load would cost the firm $29754. Would selling one additional truckload raise the firm’s profit from the current level of $895,000? By how much would the profit rise or fall? Should the manager increase production by one truckload or not?

Answer 1

By selling an additional truckload of breakfast products would bring in $43,020. This means that the Marginal revenue earned from the sale of additional truckload of breakfast products is $43,020. Producing an additional lorry load would cost the firm $29,754. This means that the Marginal cost of producing an additional lorry is $29,754. As marginal revenue earned from the sale of an additional truckload is more than the cost of producing that additional truckload, producing that additional truckload will increase the profits of the firm.

​​​​​​Profit earned by selling the additional truckload-

Profit= Marginal revenue - Marginal cost

Profit= $43,020 - $29,754

Profit= $13,266

Hence, by producing and selling that additional lorry, firm's profit will increase/rise by $13,266.

Yes, the manager should increase the production by one truckload because by doing so the firms profit would increase. As the marginal revenue earned from the sale of an additional truckload is more than the cost of producing that additional truckload ( Marginal cost), the firm's profit will increase. Hence, the manager should increase the production by one truckload.