The California Instruments Corporation, a producer of electronic equipment, make

Question

The California Instruments Corporation, a producer of electronic equipment, makes pocket calculators in a plant that is run autonomously.The California Instruments Corporation, a producer of electronic equipment, makes pocket calculators in a plant that is run autonomously. The plant has a capacity output of 200,000 calculators per year, and the plant's manager regards 75 percent of capacity as the normal or standard output. The projected total variable costs for the normal or standard level of output are $900,000, while the total overhead or fixed costs are estimated to be 120 percents of total variable costs. The plant manager wants to apply a 20 percent markup on cost.

f) Suppose that in the future the plant will sell pocket calculators to the marketing division of California Instruments and on the external imperfectly competitive market, where the price elasticity of demand is Ep = -2. What would be the net marginal revenue of the marketing division of the firm for the pocket calculators? At what price should the calculators be sold on the external market?

Explanation / Answer

plant has a capacity output of 200,000 75 percent of capacity as the normal or standard output = 0.75 x 200,000 = 150000 variable cost = $900,000 fixed costs = 1.2 x variable cost = $1080000 cost of manufacture of each unit = ($1080000+$900,000)/200000 = $ 9.9 20 % mark up on cost = 1.2 * $9.9 = $11.88 B) 200,000--> $900,000 as variable cost. for profit maximising the unit should run at demand of the market => 150000 calculators are produced so for 150000--> $675000 new price of each unit =($1080000+$675,000)/150000=$11.7 ?Q=200000-150000=50000 Q=200000 ?p=X-9.9 ***have to find X **** p=9.9 price elasticity by definition = Ep = -2 = ?Q p /?p Q X= $ 11.1375 marginal revenue (MR) is the extra revenue that an additional unit of product will bring. It is the additional income from selling one more unit of a good; sometimes equal to price.[1] It can also be described as the change in total revenue divided by the change in the number of units sold. MR=150000 x (11.1375 - 9.9 ) / 50000 = $ 3.7125 Price it has to be sold in the market = $9.9 + $ 3.7125 = $13.6125

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