1 . Intuit, the maker of TurboTax tax filing software, produces software that pr
ID: 1209073 • Letter: 1
Question
1. Intuit, the maker of TurboTax tax filing software, produces software that prepares federal income tax returns. In addition, it also produces software that prepares various state income tax returns. Why doesn't Intuit just specialize in federal software instead of producing both federal and state tax filing software? Explain your answer with specific reference to cost concepts that you have learnt. (5 points)
2. The Public Service Company of the Southwest is a natural monopoly and is regulated by an elected state utility commission. The demand function for its services has been estimated as P = 250 – 0.15Q. The total cost function of the firm is given as C = 25000 + 10Q. The commission has ordered the firm to charge a price that will just provide the firm with normal profits. What price should the firm charge, what output will be produced and what profits will be earned by the firm? Show your calculations. (6+4 points)
3. U.S. Airways experienced huge losses for several years in the 1990s, yet it continued to operate its fleets. Why didn't U.S. Airways shut down its operations to avoid the losses? Carefully analyze U.S. Airway’s decision with specific focus on the nature of variable and fixed costs in the airline industry.
Explanation / Answer
ANSWER 1.
Intuit produces two seperate softwares for income tax filing.
why would theynot specialize in one software only?
The answer perhaps lies in the concept of Contribution margin from each software. Specialization no matter how competent it may be, will not increase the contribution margin after some point. This is because, the increases in variable cost of production of highly specialized software will eat away into the contribution margin , thereby reducing the profit levels. Whereas if they produce two softwares ( one of which is built onthe same platform as th emain tax-filing format ) with minor modifications, teh variable cost is controlled considerabley for each product. Therefore the contribution margin of teh product will yiled higher profit fromthe toal sales.
3. Fixed costs of running an airline business is very high, compared to teh variable costs. To provide service to an additonal passenger doest not cost anything extra. But to set the infrastrucutre, buy the airplanes, pay the staff, payingrent/landing charges to the airports, groundhandling operations costs, etc are huge in comparison. The US airlines continued to opearte, because they recover part of the FIxed costs of infrastructure, everytime they fly. The passenger revenue and contribution margin from each passenger is high as compared to the marginal costs. Soso long as they recover the fixed costs by operating flights, even if they do not have profits above variable costs, it still good to fly.
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