Last year, a toy manufacturer introduced a new toy truck that was a huge success

Question

Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $3.0 Million for a plastic injection molding machine (which can be sold for $2.0 Million) and $300,000 in plastic injection molds specifically for the toy (not valuable to anyone else.) Labor and cost or materials necessary to make each truck is about $5.50. This year, a competitor has developed a similar toy that has significantly reduced the demand for the toy truck. Now, the original manufacturer is deciding whether they should continue production of the toy truck. If the estimated demands is 200,000 trucks:

A.) What is the break-even price for the toy truck?

B.) Should you shut down?

Explanation / Answer

Break even is when the Total Revenue(T.R) of a firm is equal to the Total Cost(T.C)(which is sum of fixed cost F.C and variable cost V.C)

F.C does not depend on the quantity whereas V.C varies depending on the quantity produced. For break even of this firm we need that 3,300,000+(5.5*200,000)=p*200,000 here p is the price of the toy

by solving above equation we get that p= $22

Now that we have obtained the price of toy for break even we must use this to obtain the price at which we can develop desired profit and then compare the price to that of opponent and if the opponent is selling at a much lower price then the demand for this product will fall rapidly and will incur huge loss, then we should shut down otherwise we can continue production.

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