For a table manufacturing company, selling price for a table is $203.00 per Unit, Variable cost...

For a table manufacturing company, selling price for a table is $203.00 per Unit, Variable cost is $23.00 per Unit, rent is $4,884.00 per month and insurance is $300.00 per month. Company wants to expand its business and improve the table quality, it wants to increase the selling price for a table to $305.00 per Unit, Variable cost to $59.00 per Unit, bigger area will have rent $6,985.00 per month and insurance is $421.00 per month At what point will the company be indifferent between the current mode of operation and the new option?

Solutions

Expert Solution

Let the quantity produced be x

In case of current mode of operation,

Total Revenue=TR=Price*output=203*x

Total Cost=TC=4884+300+23*x=5184+23*x

Profit=TR-TC=203x-5184-23x=180x-5184

In case of new option,

Total Revenue=TR=Price*output=305*x

Total Cost=TC=6985+421+59*x=7406+59*x

Profit=TR-TC=305x-7406-59x=246x-7406

Company will be indifferent if profit of both options is equal i.e.

180x-5184=246x-7406

(246-180)*x=(7406-5184)

x=(7406-5184)/(246-180)=33.67 or say 34 units

Company would be indifferent if output is 33.67 tables or say 34 tables.

Rahul Sunny answered 1 year ago

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