Total revenue minus both explicit and implicit cost is called
a.accounting profit.
b.economic profit.
c.average total cost.
d.total cost.
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RE: NEW-IMPROV AUTO-TOASTER
ATTN: FINANCE LEAD
Congratulations on your new position as Finance Lead! With that out of the way, letâs get down to your first project. Donât mess this up; your new boss does not take failure well!
Based on the equipment and facilities required for effective production, teams in logistics and requisitions have great confidence that annual fixed costs over 10 years will total $15 million (15,000,000), resulting in a fixed cost of $1.5 million (1,500,000) per year. However, due to irregularities in component and raw material acquisition, we do not have a fixed marginal cost. The data in the attached file are estimates sent to our team by the team in the logistics department.
The attached data for projected revenue per year are based on our market research and production limitations communicated to us by the logistics department here and the lead of production in the Abilene facility.
Since this is your first project as the finance lead, our team has compiled a list of elements we think are necessary to your final report.
1.Use Excel or some other software to generate a function from the data to model cost. We think it should be linear and you should probably call it (x). (2 points)
2.Similarly, you need a revenue function, likely called (x). A cubic function should provide a balance between accuracy and simplicity. However, Excel probably wonât be precise enough. Youâll need to use some other tool for this one. (2 points)
3.Of course, we need a profit function. (2 points)
4.On projects in the past, several items were considered. Find functions for marginal cost (â(x)), marginal revenue (â(x)), and marginal profit (â(x)), as well as for marginal average cost (â(x)), marginal average revenue (â(x)), and marginal average profit (â(x)). (4 points each, 24 total)
5.A few production levels are needed by management to make commitments on the project. Theyâll want to know which levels achieve: maximum average revenue, maximum average profit, and maximum profit. (5 points each, 15 total) You should also report the profit at each of those levels. (2 points each, 6 total)
6.Based on these findings, what production level do you recommend? Why? (5 points)
| (in hundreds of thousands) | (in millions of USD) | (in millions of USD) |
| items produced | cost | revenue |
| 0 | 1.5 | 0 |
| 20 | 1.945 | 1.586 |
| 40 | 2.487 | 2.528 |
| 60 | 2.951 | 3.415 |
| 80 | 3.631 | 4.455 |
| 100 | 3.877 | 4.963 |
| 120 | 4.253 | 5.242 |
| 140 | 4.927 | 5.364 |
| 160 | 5.413 | 5.302 |
| 180 | 5.949 | 5.352 |
| 200 | 6.558 | 5.457 |
