Question

A small fast-food restaurant is automating its burger production. The owner needs to decide whether to rent a machine that can produce up to 2,000 hamburgers per week at a marginal cost of $1 per burger (excluding the cost of ingredients) or another machine that can also make up to 2,000 burgers per week but at a marginal cost of $0.50 per burger (again, excluding the cost of ingredients). The weekly lease for the machine with the higher marginal cost is $1,800. The weekly lease for the machine with the lower marginal cost is $2,170. The restaurant can sell burgers for $10 per burger, and the cost of ingredients for each burger is $2.

Suppose the restaurant leases the machine with the higher marginal cost for the first week and sells 2,000 burgers that week. The restaurant owner earned profits of $_____in the first week.
Suppose now the restaurant leases the machine with the lower marginal cost for the second week and again sells 2,000 burgers that week. The restaurant owner earned profits of $_____in the second week.

Answer 1

$11,700 and $12,240

Explanation:

The computation is shown below:

As we know that

Total Revenue = No. of Sale Units × Selling Price Per Unit

= 2,000 × $10

= $20,000

Profit = Total Revenue - Total Cost

Here

Total cost = Fixed cost + variable cost

Variable Cost = No. of Sale Units × (Marginal Cost + Ingredients cost for Each Burger)

= 2,000 × ($1 + $2)

= $6,000

So,

Total Cost = Fixed Cost + Total Variable Cost

= $2,300 + $6,000

= $8,300

And, the total revenue is $20,000

Thus, the profit earned is

= $20,000 - $8,300

= $11,700

For the other case

Profit = Total Revenue - Total Cost

Here,

Total cost = Fixed cost + variable cost

Variable Cost = No. of Sale Units × (Marginal Cost + Ingredients cost for Each Burger)

= 2,000 × ($0.50 + $2)

= $5,000

So,

Total Cost = Fixed Cost + Total Variable Cost

= $2,760 + $5,000

= $7,760

And, the total revenue is $20,000

Therefore, the earned profit is

= $20,000 - $7,760

= $12,240