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Toot Boot Case

Autor:   •  September 19, 2016  •  Coursework  •  1,184 Words (5 Pages)  •  968 Views

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Toot Boot

November 24, 2015


[pic 1]

Question 1a

Profit is maximized, when Toot Boot produces up to the point where MR = MC. Given that we are provided a straight line demand curve in inverse form (P = 1120 - 4Q), we know that the marginal revenue curve will have twice the slope of the demand curve.  Therefore, the marginal revenue curve for Toot Boot is MR = 1120 - 8Q.  Marginal cost is the slope of the total cost curve.  The slope of TC = 12,000 + 100Q is 100.  So MC equals 100.    

Setting MR = MC to determine the profit-maximizing quantity:

1120 - 8Q = 100  Q = 127,5.

Substituting the profit-maximizing quantity into the inverse demand function to determine the price:

P = 1120 - (4)(127,5) = £610.

Profit equals total revenue minus total cost:

π = (610)(127,5) - (120,000 + (100)( 127,5))  π = £53,025.

Question 1b

Fixed costs: 12,000

Marginal cost: $100

Average cost when profit are maximized: TC = 12,000 + 100Q  TC = 12,000 + 100 (127,5) = 24,750

 

[pic 2]

Question 2

Variable costs increases by £10, thus TC = 12000 + 110Q

Profit equals total revenue minus total cost:

π = (610)(127,5) - (120,000 + (110)( 127,5))  π = £51,750.

Question 3:

We should not stop producing Tables based on this simplified Income Statement however we cannot state that we should definitely keep producing Tables at all.

         Desks        Cabinets        Tables        TOTAL

Sales        120        160        70        350

Variable Costs        -70        -90        -55        -215

Contribution to Profits        50        70        15        135

Margin on Sales        42%        44%        21%        39%

                                     

Allocated Overheads on Equal Weight        -40        -40        -40        -120

Net Contribution to Profits        10        30        -25        15

                                     

Allocation Overheads on Sales        -41.1        -54.9        -24.0        -120

Net Contribution to Profits        8.9        15.1        -9.0        15

                                     

Allocation Overheads on Variable Costs        -39.1        -50.2        -30.7        -120

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