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ABC plc is about to launch a new product. Facilities will allow the company to produce up to 20 units per week. The marketing department has estimated that at a price of $8,000 no units will be sold, but for each $150 reduction in price one additional unit per week will be sold. Fixed costs associated with manufacture are expected to be $12,000 per week. Variable costs are expected to be $4,000 per unit for each of the first 10 units; thereafter each additional unit will cost $400 more than the preceding one. The most profitable level of output per week for the new product is:
A) 10 Units
B) 11 Units
C) 13 Units
D) 14 UnitsHello tutor!!
I was trying to solve this question but my answer (12 Units) is not given in these four options above, don’t the right answer could you please tell my how would these kind of questions of pricing should be solve with getting right answer ?
And also it seems like it doesn’t solve with the help of formula. Right ?Please help to solve this!!
Answer is 11 units?
Tutor I am not intruding the tutor forms. I am just asking the answer as I also liked this question and attempted so get 11 units.I used the equation used for Profit maximisation MC=MR
A= 8000
B= 150
MR = a-2bq
MC = 4000+400(q-10)I am not sure…. Tutor will tell best. Wait for him to reply.
11 units is right answer but could you please tell me how do you put figures in this equation (MC= a-2bq) ?
And one more thing what figure should we put in place of MC in the formula above ?According to economist approach, at Profit maximisation point, Marginal revenue and Marginal cost are equal.
Economist write Marginal Revenue as “a-2bq” and Marginal cost as sum of variable production cost.
I hope you are able to calculate a and b by the figures that at 8000 the sales are zero and $150 reduction will increase 1 unit of Product. Hence, a = 8000 and b= 150.
Marginal cost is variable cost which it says that 4000 per unit till 10 units and 400 increase on each unit compared to preceding unit if higher than 10. Therefore, MC= 4000 + 400 (q-10).
Another method is that calculate MR and MC on all options. When they get equal or closest will be the answer. It is time taking but an authentic way.However, wait for tutor to reply because my MC equation turns false if units are less than 10.
What James124 has written is correct and is fine if you are good with algebra.
If not, then this question is more expecting you to use the tabular approach that I explain in my free lectures. It takes a little longer but does not require the sue of algebra.
(If you are using a Revision Kit from one of the ACCA Approved Publishers (as indeed you should be doing), then I am rather surprised that they do not show the workings in the answer provided!)
Hello tutor, I don’t know the tabulor approach enough. I have studied but do not have much command so open to many errors. Will examiner allow both methods or restrict to use any one?
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