Question

Division X makes a part with the following characteristics:

Production capacity 25,000 units
Selling price to outside customers $ 18
Variable cost per unit $ 11
Fixed cost, total $ 100,000

Division Y of the same company would like to purchase 10,000 units each period from Division X. Division Y now purchases the part from an outside supplier at a price of $17 each. Suppose Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into sales to outside customers.

If Division X refuses to accept the $17 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be:

Answer 1

To find the profit-maximizing quantity for Doggies Paradise Inc., total revenue, marginal revenue, total cost, and marginal cost must be calculated for one to five units.

Step-by-step explanation:

Cost Analysis and Profit Maximization

A perfectly competitive firm, Doggies Paradise Inc., sells dog winter coats for $72 each. To determine the profit maximizing quantity, we must analyze total revenue, marginal revenue, total cost, and marginal cost for each output level from one to five units.

First, we calculate the total revenue by multiplying the number of units sold by the price, which is 72 dollars per dog coat. Marginal revenue in a perfectly competitive market is equal to the price of the good, so it remains $72 for each additional unit sold.

Total cost is the sum of fixed costs and variable costs at each level of production. Marginal cost is the additional cost incurred by producing one more unit.

To find the profit-maximizing quantity, we should keep producing units until the marginal cost equals the marginal revenue. If the marginal cost exceeds the marginal revenue, it means producing the additional unit would result in a loss; hence, production should stop before this point.

Based on the figures provided, to calculate the profit or losses, we subtract the total cost from the total revenue at each level of output. Once the table is created and analyzed, we can graph the total revenue and total cost curves, and marginal revenue and marginal cost curves to visually ascertain the profit-maximizing quantity where the marginal revenue and marginal cost intersect.

Answer 2

Amount to be lost= $60,000

Step-by-step explanation:

The Division X is operating at less than full capacity, hence it has excess capacity

This implies that it can produce enough to meet both the internal and external buyers. In this situation, the minimum transfer will be

minimum transfer price= Variable cost= $11

If Division X refuses to accept $17, the company has a whole will lose

amount paid by Division Y to the external supplier in excess of $11 .

Amount to be lost = (17-11)× 10,000

= $60,000