You are the manager of GearNet and must decide how many internethubs to produce to maximize your firmâs profit. GearNet and itsonly rival, NetWorks, sell dual-speed internet hubs that areidentical from consumersâ perspective. The market price for hubsdepends on the total quantity produced by the two firms. A surveyreveals that the market price of hubs depends on total marketoutput as follows:
Total Quantity produced Price per unit
500 units $120
750 units $100
1000 units $90
Both firms have a similar structure of production and use labor,materials and machines to produce output. They hire labor andpurchase materials on an as-needed basis. The machines they usewere purchased three years ago, when they started the business. Theaccounting department of GearNet provides the following data forunit production costs, which are similar for NetWorks also:
Item 250 units 500 units
Labor $40 $40
Materials $30 $30
deprec. charge $80 $40
Technological constraints require each firm to produce either250 hubs or 500 hubs. Identify the costs that are relevant for yourdecision, show the payoffs of the game in a normal form game, andthen determine whether GearNet should produce 250 hubs or 500 hubs.Assuming that firms cannot cut down costs any further, is there anyother way you can increase the profit of the firm?
You are the manager of GearNet and must decide how many internethubs to produce to maximize your firmâs profit. GearNet and itsonly rival, NetWorks, sell dual-speed internet hubs that areidentical from consumersâ perspective. The market price for hubsdepends on the total quantity produced by the two firms. A surveyreveals that the market price of hubs depends on total marketoutput as follows:
Total Quantity produced Price per unit
500 units $120
750 units $100
1000 units $90
Both firms have a similar structure of production and use labor,materials and machines to produce output. They hire labor andpurchase materials on an as-needed basis. The machines they usewere purchased three years ago, when they started the business. Theaccounting department of GearNet provides the following data forunit production costs, which are similar for NetWorks also:
Item 250 units 500 units
Labor $40 $40
Materials $30 $30
deprec. charge $80 $40
Technological constraints require each firm to produce either250 hubs or 500 hubs. Identify the costs that are relevant for yourdecision, show the payoffs of the game in a normal form game, andthen determine whether GearNet should produce 250 hubs or 500 hubs.Assuming that firms cannot cut down costs any further, is there anyother way you can increase the profit of the firm?
Related questions
Barker Company has a single product called a Zet. The companynormally produces and sells 86,000 Zets each year at a sellingprice of $46 per unit. The companyâs unit costs at this level ofactivity are given below: |
| Directmaterials | $ | 9.50 | |
| Direct labor | 9.00 | ||
| Variablemanufacturing overhead | 2.80 | ||
| Fixed manufacturingoverhead | 6.00 | ($516,000 total) | |
| Variable sellingexpenses | 3.70 | ||
| Fixed sellingexpenses | 5.50 | ($473,000 total) | |
| Total cost perunit | $ | 36.50 | |
| A number of questions relatingto the production and sale of Zets are given below. Each questionis independent. |
| Required: | |
| 1. | Assume that Barker Company has sufficient capacity to produce120,400 Zets each year without any increase in fixed manufacturingoverhead costs. The company could increase sales by 40% above thepresent 86,000 units each year if it were willing to increase thefixed selling expenses by $140,000. |
| a. | Calculate the incremental netoperating income (Negative amount should beindicated with a minus sign. Do not roundintermediate calculations. Omit the "$" sign inyour response.) |
| Incremental netoperating income | $ |
| b. | Would the increased fixedselling expenses be justified? | ||||
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| 2. | Assume again that Barker Company has sufficient capacity toproduce 120,400 Zets each year. The company has an opportunity tosell 34,400 units in an overseas market. Import duties, foreignpermits, and other special costs associated with the order wouldtotal $27,520. The only selling costs that would be associated withthe order would be $1.30 per unit shipping cost. Compute the perunit break-even price on this order. (Do not roundintermediate calculations. Round your answer to 2 decimal places.Omit the "$" sign in your response.) |
| Break-even price perunit | $ |
| 3. | One of the materials used in the production of Zets is obtainedfrom a foreign supplier. Civil unrest in the supplierâs country hascaused a cutoff in material shipments that is expected to last forthree months. Barker Company has enough material on hand to operateat 25% of normal levels for the three-month period. As analternative, the company could close the plant down entirely forthe three months. Closing the plant would reduce fixedmanufacturing overhead costs by 30% during the three-month periodand the fixed selling expenses would continue at two-thirds oftheir normal level. What would be the impact on profits of closingthe plant for the three-month period?(Input the amount as a positive value.Round your intermediate calculations of units produced and sold tothe nearest whole number. Do not round your other intermediatecalculations. Omit the "$" sign in your response.) |
| Net (Click toselect)disadvantageadvantage of closing the plant | $ |
| 4. | The company has 500 Zets on hand that were produced last monthand have small blemishes. Due to the blemishes, it will beimpossible to sell these units at the normal price. If the companywishes to sell them through regular distribution channels, whatunit cost figure is relevant for setting a minimum selling price?(Round your answer to 2 decimal places. Omit the "$" signin your response.) |
| Relevant unitcost | $ |
| 5. | An outside manufacturer has offered to produce Zets and shipthem directly to Barkerâs customers. If Barker Company accepts thisoffer, the facilities that it uses to produce Zets would be idle;however, fixed manufacturing overhead costs would continue at 30%.Because the outside manufacturer would pay for all shipping costs,the variable selling expenses would be reduced by 60%. Compute theunit cost that is relevant for comparison to the price quoted bythe outside manufacturer. (Do not roundintermediate calculations. Round your answer to 2decimal places. Omit the "$" sign in your response.) |
| Total avoidable unitcost | $ |
