Question

Ollah’s Organic Pet Shop sells bags of cedar chips for pet bedding or snacking (buyer’s choice). The supplier has offered Ollah the following terms:

Order 1-100 bags, and the price is $6.00 a bag.
Order 101 or more bags, and the price is $4.50 a bag.
Annual demand is 630 bags, fixed ordering costs are $9 per order, and the per-bag holding cost is estimated to be around $2 per year.
A)The EOQ for the bags is _____.
B) If order quantity is EOQ, the total annual cost to Ollah is $________.
C) If order quantity is 101 for quantity discount, the total annual cost to Ollah is $________.

Answer 1

To determine the profit maximizing quantity for Doggies Paradise Inc., total revenue, marginal revenue, total cost, and marginal cost must be calculated for each output level and plotted as curves to find the point where marginal cost equals marginal revenue.

Step-by-step explanation:

The problem describes the scenario of a perfectly competitive firm, Doggies Paradise Inc., which sells winter coats for dogs at a price of $72 each. It includes fixed costs and variable costs for producing units. To find the profit maximizing quantity, we calculate the total revenue, marginal revenue, total cost, and marginal cost for output levels from one to five units.

• Total Revenue (TR) is the total money received from selling goods which equals price times quantity.
• Marginal Revenue (MR) is the additional revenue gained from selling one more unit, which in perfectly competitive markets, equals the price of the product.
• Total Cost (TC) is the sum of fixed and variable costs at each output level.
• Marginal Cost (MC) is the additional cost incurred from producing one more unit.

Based on these definitions and the given data, we can calculate the values and plot the total revenue and total cost curves, and the marginal revenue and marginal cost curves. The profit maximizing quantity is found where marginal revenue equals marginal cost (MR=MC), provided that MR and MC are covering the AVC (average variable cost).