Question

# The Advanced Engineering Economic Company ('AEE') is currently making its product (MEM502) in a process-focused shop,...

The Advanced Engineering Economic Company ('AEE') is currently making its product (MEM502) in a process-focused shop, where rental payments are \$8000 per year and material costs are \$40 per unit. Records show that AEE currently sells 200 units of the product MEM502 for \$200 each. As the manager of AEE, you are considering a proposed repetitive focus in order to lowest costs, and hence, lower prices; thereby raising the demand. the proposed shop however, has rental payments of \$24,000 per year and material costs of \$10 per unit.

a) Formulate the total cost and profit function for AEE (show full solution)

b) if a price of \$80 will allow 400 units to be sold, using the Analytical method, determine what profit(or loss) the proposed new process can generate. (show full solution)

C) determine the new break-even quantity and total cost using the graphical method.

d) as the manger of AEE, would you change the process? Explain why

 a) Cost Function: Current Process TC=40Q+8000 TC=Total Cost Q=Quantity Produced Sales Revenue =200Q Profit (P)=200Q-40Q-8000 P =160Q-8000 NEW PROCESS: TC=10Q+24000 P=200Q-10Q-24000=190Q-24000 b) If Sales Price is \$80 Profit Function: P=80Q-10Q-24000=70Q-24000 Q=400 P=70*400-24000=\$4,000 Profit =\$4,000 C)Graphical Method Q P=70Q-24000 Quantity Profit 100 -\$17,000 200 -\$10,000 300 -\$3,000 343 \$10 400 \$4,000 500 \$11,000 D)Profit with existing Process for 200 units P=160*200-8000= \$24,000 Profit for new process with Q=200: 190*200-24000= \$14,000 Profit for new process with Q=400 \$4,000 Profit will decrease Process should not be changed

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