P2 Practice Notes Answers pg163 Exercise 2

Hi,

Re the above question – could someone elaborate as to how to arrive at the profit levels noted for various demand levels / contract sizes?

I simply can’t get close – eg Demand Level 400 – Contact Size 300 – answer is $2900 profit?

Are we assuming production at 1200? (which would result in heavy losses from producing additional units for 400 demand)

Or are we assuming JIT style production? Therefore 300 demanded under contract @ $3pu contribution ($9-$6) = $900 minus cost of 100 extra produced? (100x$6=$600) Total profit = £300

or are we assuming additional 100 units can be sold outside of contract therefore additional contribution of $5($11-$6) still only gets total profit of $1400?

I can’t get profit levels anywhere near those quoted in the answers….?

Help!

Regards

Andy