Two companies, Lawnman Inc. and Tauro Co., are competing in the manufacture and

Question

Two companies, Lawnman Inc. and Tauro Co., are competing in the manufacture and sale of a new type of kryptonite-powered lawnmowers. Lawnman has a somewhat older plant and requires a variable cost of $150 per lawnmower; its fixed costs are $200,000 per year. Tauro's plant is more automated and thus has lower unit variable costs of $100; its fixed cost is $400,000.

     Since the two companies are close competitors, they both sell their product at $250 per unit.

A) What is the break-even quantity for each?

B) At which quantity would the two companies have equal profits?

C) If sales of each company were to reach 4,500 units per year, which company would be more profitable? Why?

Explanation / Answer

a) Break even point is where Revenues equal total costs.

Lawnman: 200000 + 150Q = 250Q; Q=1000;

Tauro: 400000 + 100Q = 250Q; Q = 2667.

B) Profits will be equal when costs are equal because revenue is equal for both the companies. 200000+150Q=400000+100Q

Q= 4000.

C) ProfitL = 250*4500 - 200000-150*4500=250000

ProfitT = 250*4500 - 400000 - 100*4500 = 2,75,000.

In case of Tauro Fixed costs are more so as the quantity increases AFC decreases and TVC also decreases compared to Lawnman. But in the intial phases, Lawnman is at advantage because of Lower fixed costs.

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