1. (6 points) The Capital Catering Company specializes in making hors d\'oeuvres
ID: 1124519 • Letter: 1
Question
1. (6 points) The Capital Catering Company specializes in making hors d'oeuvres for receptions. It goal is to maximize profit. A small business operated out of a rented test kitchen, it has fixed costs (FC) of $2,000 per week for space rental plus variable costs (VC) for labor and ingredients Six weekly output levels (Q) and associated VC appear below. To lay the foundation for management decisions, please complete the table below with total cost (TC), average variable cost (AVC), average total cost (ATC), incremental change in variable cost (AVC), incremental change in quantity (AQ), and marginal cost (MC) (calculated from the incremental change numbers). Round AVC, ATC and MC yalues to two decimal places (cents) 0 248 800 784 1,600 3 2,cco ,800 3.23 1.2 3,00 2. 4.5 1.416 | 2,400 |.uco |/09 | 3.12 | Zoo | ,, 1,952 | 3,200 | 5200 | h u y | 2 , le | 80c | 51 1 2,200 4,000 L .coe l 1.82 lans l 8tD | 1112 | ao 2. (8 points) Capital has a major client willing to contract to pay $3 per item. a. Should it accept a contract at this price in the long run (beyond the end of the current kitchen lease)? If so, what output levels could be profitable in the long run? b. Should it accept a contract at this price in the short run? Iif so, what output levels could be profitable in the short run? What is the most profitable output level? c. d. How did you identify the most profitable output level? (6 points) For next week, Capital has no sales contracted, but it gets a call offering $2 per item. a. Should it accept a contract at this price in the long run (beyond the end of the current 3. kitchen lease)? If so, what output levels could be desirable in the long run (either to maximize profit or to minimize loss)? Should it accept a contract at this price in the short run (just next week)? If so, what output levels could be desirable in the short run? If accepting the contract is desirable, what is the optimal output level? b. c.Explanation / Answer
(3)
(a) In the long run, firm will seek to earn profits such that price exceeds ATC. At a price of $2, ATC is higher than prie for all output levels, indicating a long run loss. Therefore, Capital will not accept the contract to sell at a price of $2.
(b) In the short run, Capital wants to cover its variable costs with revenue, therefore price should exceed AVC. For output levels of 1416, 1952 and 2200 units, price ($2) is higher than AVC, and these output levels are desirable.
(c) Out of the three output levels mentioned above, ATC is minimum (= $2.66) for output level of 1952 units, therefore this is the optimal output level since loss will be minimized at this level.
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