Question

Cheong Automobile Company fabricates automobiles. Each vehicle includes one water pump, which is currently made in-house. Details of the water pump assembly are as follows: Volume 1200 units per month Variable cost per unit $11.50 per unit Fixed costs $10,000 per month An Indonesian factory has offered to supply Cheong Automobile Company with ready-made units for a cost of $16 for each water pump. Assume that Cheong's fixed costs are unavoidable and that Cheong will not be able to use the excess capacity in any profitable manner. If Cheong decides to outsource, monthly operating income will ___

Answer 1

To determine the profit-maximizing quantity of output, we compare total revenue and total cost, as well as analyze marginal revenue and marginal cost. Total revenue and total cost curves can be sketched on a diagram, while marginal revenue and marginal cost curves would have different shapes.

Step-by-step explanation:

The profit-maximizing quantity of output can be determined by comparing the total revenue and total cost for each output level. By calculating the total revenue and total cost for producing one to five units of aquariums, we can find the level at which the difference between total revenue and total cost is the greatest.

To calculate the profit-maximizing quantity of output, we can also analyze the marginal revenue and marginal cost for each output level. The profit-maximizing quantity of output occurs where marginal revenue is equal to marginal cost.

On a diagram, the total revenue curve would start from zero at one unit and increase as more units are sold. The total cost curve would start from a fixed cost level and increase as the variable cost increases with each unit produced. The marginal revenue curve would have a downward slope as the quantity increases, while the marginal cost curve would initially decrease and then start to increase as output increases.

Answer 2

Answer: Monthly operating income will decrease by $5400.

Step-by-step explanation:

Volume = 1200 units per month

Variable cost per unit = $11.50 per unit

Fixed costs = $10,000 per month

Since Cheong decides to outsource, the monthly operating income will be calculated thus:

= Volume × (Cost of ready made units - Variable cost per unit)

= 1200 × (16 - 11.50)

= 1200 × 4.50

= $5400

Therefore, the monthly operating income will decrease by $5400.