Toot Boot Case
Autor: petemackie • September 19, 2016 • Coursework • 1,184 Words (5 Pages) • 876 Views
Toot Boot
November 24, 2015
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Question 1a
Profit is maximized, when Toot Boot produces up to the point where MR = MC. Given that we are provided a straight line demand curve in inverse form (P = 1120 - 4Q), we know that the marginal revenue curve will have twice the slope of the demand curve. Therefore, the marginal revenue curve for Toot Boot is MR = 1120 - 8Q. Marginal cost is the slope of the total cost curve. The slope of TC = 12,000 + 100Q is 100. So MC equals 100.
Setting MR = MC to determine the profit-maximizing quantity:
1120 - 8Q = 100 → Q = 127,5.
Substituting the profit-maximizing quantity into the inverse demand function to determine the price:
P = 1120 - (4)(127,5) = £610.
Profit equals total revenue minus total cost:
π = (610)(127,5) - (120,000 + (100)( 127,5)) → π = £53,025.
Question 1b
Fixed costs: 12,000
Marginal cost: $100
Average cost when profit are maximized: TC = 12,000 + 100Q → TC = 12,000 + 100 (127,5) = 24,750
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Question 2
Variable costs increases by £10, thus TC = 12000 + 110Q
Profit equals total revenue minus total cost:
π = (610)(127,5) - (120,000 + (110)( 127,5)) → π = £51,750.
Question 3:
We should not stop producing Tables based on this simplified Income Statement however we cannot state that we should definitely keep producing Tables at all.
Desks Cabinets Tables TOTAL
Sales 120 160 70 350
Variable Costs -70 -90 -55 -215
Contribution to Profits 50 70 15 135
Margin on Sales 42% 44% 21% 39%
Allocated Overheads on Equal Weight -40 -40 -40 -120
Net Contribution to Profits 10 30 -25 15
Allocation Overheads on Sales -41.1 -54.9 -24.0 -120
Net Contribution to Profits 8.9 15.1 -9.0 15
Allocation Overheads on Variable Costs -39.1 -50.2 -30.7 -120
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