Question

1. A company produces products A and B using the same plant. Product A is sold in the market at a price of 300 EUR, which is 60 EUR above its cost per unit. A company produces 2.000 units of product A and 1.000 units of product B. Product B’s cost per unit is 150 EUR, while the price at which product B is sold in the market is 120 EUR. Costs per unit for both products were calculated by considering the fact that production of product A uses 60% of the plant’s available capacities and production of B uses the remaining 40% of these capacities. The company’s total fixed costs are 100,000 EUR. Due to limited demand for product A, the company cannot increase the production of A or produce any other product, except B. Considering the fact that the company has a loss from production of product B, explain whether you would recommend the company should stop producing product B? Please, answer the question by calculating all the necessary information using 5 different ways of explanation, all using the same logical framework and leading to the same conclusion.

3.7. Company Z has production capacities that allow production of 20.000 units of product per year. Market analysis showed that 8.000 products could be sold in the domestic market at 50 EUR per piece. Total fixed costs are 80.000 EUR per year, total variable costs increase proportionally up to 10.000 produced units, beyond this production limit they increase progressively. Total variable costs for 8.000 products are 240.000 EUR. Company Z could increase the capacity usage rate by exporting 2.000 products in Croatia. The problem is that the price in Croatia would have to be lower, only 35 EUR per piece.

Which of the following statement is correct?

1. A company should not accept the proposed export deal because the selling price (35 EUR) is lower than the unit cost (40 EUR).
2. A company should not accept the proposed export deal because the revenues generated in Croatian market (70,000 EUR) are not enough to cover all the variable costs (60,000 EUR) plus corresponding portion of fixed costs (16,000 EUR).
3. A company should not accept the proposed export deal because the revenues generated in Croatian market (70,000 EUR) are not enough to cover all fixed costs (80,000) and therefore the existing net income will decrease for 10,000 EUR.
4. A company should accept the proposed export deal because the revenues generated in Croatian market (70,000 EUR) are enough to cover all additional costs related to the deal (60,000 EUR) and therefore the existing net income will increase for 10,000 EUR.
5. A company should accept the proposed export deal because the revenues generated in Croatian market (70,000 EUR) are enough to cover fixed costs related to the deal (16,000 EUR) and therefore the existing net income will increase for 16,000 EUR.

Answer 1