Question

General Instructions

Redstone Clayworks, Inc. is located in Sedona, Arizona and manufactures clay fire pits for patios. They are one of about two dozen firms around the world that manufacture and sell clay fire pits for retailers such as Home Depot, Lowe’s, Front Gate, and other upscale home product chains. There is virtually no product differentiation. A clay fire pit is a clay fire pit.

Assume that the world market demand and supply curves for clay fire pots intersects at $300 per unit.

The spreadsheet below gives some of Redstone’s production cost data. A template for the spreadsheet is provided in the Course Materials.

Q	TC	TFC	TVC
0	6,000	6,000	-
100	12,000	6,000	6,000
200	15,000	6,000	9,000
300	21,000	6,000	15,000
400	33,000	6,000	27,000
500	48,000	6,000	42,000
600	65,000	6,000	59,000
700	83,000	6,000	77,000
800	102,000	6,000	96,000
900	123,000	6,000	117,000
1000	158,000	6,000	152,000

Add columns to show, respectively, average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and short-run marginal cost (SMC). Then, add columns to show, respectively, total revenue (TR), marginal revenue (MR), total profit, average profit, and profit margin.

Place your completed spreadsheet in the Drop Box,and use it to answer questions 1-7. Your spreadsheet and calculations are worth 15 points and count as 500 words toward your word count requirement.

Your spreadsheet must include formulas showing how you arrived at the calculations. As an alternative, you may also submit a document showing your step-by-step calculations for each of the cells. You will not receive credit if you do not show your work using one of these two methods.

For Questions 2, 4, and 5, be sure to employ both of the General Rules for Implementing the Output Decision in your explanations.

A detailed explanation should be given for each question.

Answer 1

from the above data

1. Profit Margin per unit is maximum at 300 units of production ($230 per unit). Hence, to maximize profit margin Redstone shall produce 300 units.

2. For Maximum profit Manager should produce 900 units ($ 147000). After 900 units marginal profit is negative which mean additional cost for producing one unit is excessive to the revenue generated from that unit. The cost for one extra unit after 900 units is $350 while revenue form additional unit is $300. Hence, we loose $50 per unit. We can clearly see that profit from producing 1000 units id $142000 which is less than profit generated at 900 units.

3. No, ideal output for above questions is not the same, At 300 units profit margin is at maximum at $230 per unit. Even though for producing more units after 300, profit margin for unit decreases but it is positive. Positive Profit Margin implies incremental revenue from extra unit is more than incremental cost to produce that unit, hence adding up to the overall profit. After 900 units, profit margin for extra unit becomes negative. Hence it is not profitable to produce any unit beyond 900.

4. FC being $12000 instead of $6000

The answer to question remains the same: Maximum profit at 900 units. However, maximum profit decreased by $6000 to $141000. Reason being Profit Margin is not effected by fixed cost.

5. Same price being $85 per unit instead of $300.

Manager should produce 300 units, as beyond that profit margin is negative

comment below if you have any doubt regarding this one.than you