Suppose a corporation has two subsidiaries, one of which is unregulated and sell

Question

Suppose a corporation has two subsidiaries, one of which is unregulated and sells all of its output to the other, regulated subsidiary. Permitted profits at the regulated subsidiary are equal to 10 percent of total costs. The initial profit picture for the subsidiaries is provided in the table below:

If the unregulated subsidiary doubles its selling price to the regulated subsidiary, what are the new profits at

Instructions: Enter your responses as a whole number.

(a) The unregulated subsidiary?

profit = $

(b) The regulated subsidiary?

profit = $

Unregulated Subsidiary Regulated Subsidiary    Total revenue $ 350,000 N/A    Total costs $ 200,000 $ 1,000,000    Total profit $ 150,000 $ 100,000

Explanation / Answer

(a) The unregulated subsidiary?

profit = $ 5,00,000

due to doubling of price, revenue will double to 7,00,000. profit= 7,00,000-2,00,000= $5,00,000

(b) The regulated subsidiary?

profit = $ 1,35,000

as unregulated subsidiary all his output to regualated subsidiary so increase in revenue of unregulated subsidiary due to price doubling, wil increase cost of regulated subsidiary by 3,50,000 and as 10% profit is earned on cost. so profit will increase by $35,000 ( from 1,00,000 to 1,35,000)

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