Modifying a product to increase its “value added” benefits customers and can als

Question

Modifying a product to increase its “value added” benefits customers and can also enhance supplier profits. For example, suppose an improved version of a product increases customer value added by $25 per unit. (In effect, the demand curve undergoes a parallel upward shift of $25.)a. If the redesign is expected to increase the item’s marginal cost by $30, should the company undertake it? b. Suppose instead that the redesign increases marginal cost by $15. Should the firm undertake it, and (if so) how should it vary its original output and price?

Explanation / Answer

A For this situation, the organization ought not to take it in light of the fact that the value added will include 25 dollars and the expansion in marginal cost cost per unit is 30 dollars. This would bring about lost 25-30=5 dollars for each unit created.

B For this situation, the organization ought not to take it on the grounds that the value added will include 25 dollars and the expansion in marginal cost per unit to 45 dollars. This would bring about lost 25-45=20 dollars for every unit delivered.

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