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In: Accounting

A laptop manufacturer can produce laptops at a cost of $400 per unit and incurs a...

A laptop manufacturer can produce laptops at a cost of $400 per unit and incurs a fixed cost of $100,000 which is independent of the quantity produced. Currently the selling price of a laptop is $1400 and the resulting demand (or quantity sold, since both are the same) is 220,000 units. It is also known that a $2 decrease in price will increase the demand by 200 units. Assume the demand function is linear and fully known.

A. What is the maximum (highest) profit?

B. Assuming there is no fixed cost is (so fixed cost is $0 instead of $100,000), how high can the variable cost (which is $400 per unit currently) go so that the laptop manufacturer at least breaks even (or equivalently makes a non-negative maximum profit)?

Solutions

Expert Solution

Ans:

A.

Option 1 ( Selling 220,000 laptops at $1,400 per laptop)

Fixed cost: $1,00,000

Variable cost: $400 per laptop.

Total Variable cost: $400*220,000= $88,000,000

Total Cost: $88,100,000

Totral Sale price: 220,000*$1,400= $308,000,000

Profit: $308,000,000-$88,100,000= $219,900,000

Option 2 ( Selling 220,200 laptops at $1,398 per laptop)

Fixed cost: $1,00,000

Variable cost: $400 per laptop.

Total Variable cost: $400*220,200= $88,080,000

Total Cost: $88,180,000

Totral Sale price: 220,200*$1,398= $307,839,600

Profit: $307,839,600-$88,180,000= $219,659,600

So option 1 is better.

B.

If Fixed cost is nil, Variable cost can be a maximum of $1,400 per unit. Till $1,400 variable cost no loss will be suffered by the manufacturer. So the brake even variable cost will be $1,400 in case of $0 fixed costs.

ekkarill92 answered 2 years ago
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