Question

Wilson Co. has three segments - Tennis, Golf, and Fishing. The Tennis segment is currently producing 2000 units annually. The units sell for 200 each. The cost of each unit is110. The Tennis segment spends 100,000 on product design each year. The segment also is allocated200,000 of annual facility-level costs. Using quantitative analysis, should Wilson eliminate the Tennis segment? What should be the effect on profit?

1) Yes, eliminating the Tennis segment will increase profit
2) No, eliminating the Tennis segment will decrease profit
3) Cannot be determined without further analysis
4) Not enough information provided

Answer 1

Based on the given information, producing 5 units of a product and selling them for $25 each would result in a loss for the company. The average cost per unit is higher than the selling price, indicating a loss. The marginal unit produced does not contribute to profits as the marginal cost per unit is higher than the selling price.

Step-by-step explanation:

a. To calculate the company's profits or losses, we need to subtract the total costs (fixed costs + variable costs) from the total revenue. Using the given information, the total costs for producing 5 units are $100 (fixed costs) + $270 (variable costs) = $370. The total revenue is calculated by multiplying the quantity sold (5 units) by the selling price ($25 each), which gives us $125.

b. To determine whether the company is making or losing money at this price, we can compare the average cost per unit with the selling price. The average cost per unit is calculated by dividing the total costs by the quantity produced. In this case, the average cost per unit is $370 / 5 units = $74. Since the average cost per unit is higher than the selling price ($74 > $25), the company is losing money.

c. The marginal unit produced can be identified by looking at the marginal cost. The marginal cost is the additional cost of producing one more unit. In this case, the marginal cost of producing the fifth unit is $270 (variable cost for 5 units) - $184 (variable cost for 4 units) = $86. Since the selling price per unit ($25) is lower than the marginal cost per unit ($86), producing the marginal unit does not add to profits.