Question

General Instructions

Redstone Clayworks, Inc. is located in Sedona, Arizona and manufactures clay fire pits for patios. They are one of about two dozen firms around the world that manufacture and sell clay fire pits for retailers such as Home Depot, Lowe’s, Front Gate, and other upscale home product chains. There is virtually no product differentiation. A clay fire pit is a clay fire pit.

Assume that the world market demand and supply curves for clay fire pots intersects at $300 per unit.

The spreadsheet below gives some of Redstone’s production cost data. A template for the spreadsheet is provided in the Course Materials.

Q	TC	TFC	TVC
0	6,000	6,000	-
100	12,000	6,000	6,000
200	15,000	6,000	9,000
300	21,000	6,000	15,000
400	33,000	6,000	27,000
500	48,000	6,000	42,000
600	65,000	6,000	59,000
700	83,000	6,000	77,000
800	102,000	6,000	96,000
900	123,000	6,000	117,000
1000	158,000	6,000	152,000

Add columns to show, respectively, average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and short-run marginal cost (SMC). Then, add columns to show, respectively, total revenue (TR), marginal revenue (MR), total profit, average profit, and profit margin.

Your spreadsheet must include formulas showing how you arrived at the calculations. As an alternative, you may also submit a document showing your step-by-step calculations for each of the cells. You will not receive credit if you do not show your work using one of these two methods.

For Questions 2, 4, and 5, be sure to employ both of the General Rules for Implementing the Output Decision in your explanations.

A detailed explanation should be given for each question.

1. If Redstone wishes to maximize profit margin, how many units should it produce?   

2.What level of output should the manager of Redstone choose to produce? Explain your choice in at least 100 words.

3.Are your output choices the same in questions 1 and 2? Why or why not? Explain using at least 100 words.

4.Make a copy of your spreadsheet and double the fixed costs. How does this change your answer to question 2? Explain in detail.

5. Make another copy of your spreadsheet and suppose that fire pits fall out of fashion causing prices fall worldwide to $85. How many units should the manager choose to produce? Explain.

Answer 1

А в M Q: Units Produced TC:Total Cost TFC: Total F ixed Cost TVC: | Total Variable Cost AFC: AVC: ATC: Average Average Average Fixed Variable Total Cost Cost Cost SMC : Short run Marginal Cost AP: TR: Total MR: Marginal TP: Total Average Revenue Revenue Profit Profit MP: Profit Margin TC/Q Logical Formula *Change in TC/ *$300*Q TVC TFC/ Q TVC/Q or Excel Formula for 200 units > C8/A8 D8/A8 or NA 60.0 100 200 300 400 500 600 6000 12000 15000 21000 33000 48000 65000 83000 102000 123000 158000 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 9000 15000 27000 42000 59000 77000 96000 117000 152000 Infinity 60.0 30.0 20.0 15.0 12.0 10.0 60.0 45.0 50.0 67.5 84.0 98.3 110.0 120.0 130.0 152.0 *Change in TP/ *Change in TR/ TR-TC Change in Q ΤΡ/α AFC+AVC Change in Q Change in a MR-MC B8/A8 (K8-K7)/(A8-A7) or (B8-B7)/(A8-A7) A8*300 (18-17)/(A8-A7) 18-38 K8/A8 E8+F8 J8-H8 Infinity NA NA -6000 Infinity 120.0 30000 300.00 18000 180.0 240.0 75.0 30.0 60000 300.0 45000 225.0 270.0 70.0 60.0 90000 300.00 69000 230.0 240.0 82.5 120.0 120000 300.0 87000 217.5 180.0 96.0 150.0 150000 300.0 102000 204.0 150.0 108.3 170.0 180000 300.00 115000 191.7 130.0 118.6 180.0 210000 300.0 127000 181.4 120.0 127.5 190.0 240000 300.00 138000 172.5 110.0 136.7 210.00 270000 300.0 147000 163.3 90.0 158.0 350.00 300000 300.0 142000 142.0 -50.00 700 8.6 7.5 800 900 1000 6.7 6.0

1. Profit Margin per unit is maximum at 300 units of production ($230 per unit). Hence, to maximize profit margin Redstone shall produce 300 units.

2. For Maximum profit Manager should produce 900 units ($ 147000). After 900 units marginal profit is negative which mean additional cost for producing one unit is excessive to the revenue generated from that unit. The cost for one extra unit after 900 units is $350 while revenue form additional unit is $300. Hence, we loose $50 per unit. We can clearly see that profit from producing 1000 units id $142000 which is less than profit generated at 900 units.

3. No, ideal output for above questions is not the same, At 300 units profit margin is at maximum at $230 per unit. Even though for producing more units after 300, profit margin for unit decreases but it is positive. Positive Profit Margin implies incremental revenue from extra unit is more than incremental cost to produce that unit, hence adding up to the overall profit. After 900 units, profit margin for extra unit becomes negative. Hence it is not profitable to produce any unit beyond 900.

4. FC being $12000 instead of $6000

AP: Q: Units Produced TC:Total Cost TFC: Total Fixed Cost TVC: Total Variable Cost AFC: Average Fixed Cost AVC: ATC: Average Average Variable Total Cost Cost SMC : Short run Marginal Cost TR: Total MR: Marginal TP: Total Revenue Revenue Profit Average MP: Profit Margin Profit Logical Formula *Change in TC/ TVC+TEC *Change in TR/ TFC/Q *$300*0 TVC/Q TR-TC T P/Q Excel Formula for 200 units > C8/A8 D8/A8 or 12000 120 0 100 200 / 18000 21000 27000 39000 54000 71000 89000 108000 129000 164000 400 500 600 700 800 900 1000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 6000 9000 15000 27000 42000 59000 77000 96000 117000 152000 Infinity 120.0 60.0 40.0 30.0 24.0 20.0 17.1 15.0 13.3 12.0 Tc/a *Change in TP/ Change in Q Change in Q Change in Q AFC+AVC MR-MC B8/A8 (K8-K7)/(A8-A7) (B8-87)/(A8-A7) A8*300 (18-17)/(A8-A7) 18-88 K8/A8 E8+F8 18-H8 Infinity NA O NA L -12000 Infinity 180.0 60.00 30000 300.01 12000 120.0 240.0 105.0 30.0 60000 300.0 39000 195.0|| 270.0 90.00 60.0 90000 300.00 63000 210.0 240.0|| 97.5 120.00 120000 300.00 81000| 202.5|| 180.0 108.0 150.0 150000 300.00 96000 192.0 150.0| 118.3 170.01 180000 300.0 109000 181.7 130.0| 127.1. 180.01 210000 300.0 121000 1 72.9 120.0 135.0 190.0 240000| 300.0 132000 165.0 110.0 143.3 210.00 270000 300.0 141000 7 156. 9 0.0 164.0 350.00 300000 300.0 136000 136.0 -50.00 NA 60.0 45.0 50.0 50.0 67.5 84.0 98.3 110.0 120.0 130.0 152.0 1

The answer to question remains the same: Maximum profit at 900 units. However, maximum profit decreased by $6000 to $141000. Reason being Profit Margin is not effected by fixed cost.

5. Same price being $85 per unit instead of $300.

TC:Total Q: Units Produced | Cost TFC: Total F ixed Cost AFC: Average Fixed Cost Total Variable Cost AVC: ATC: Average Average Variable Total Cost Cost SMC : Short | AP: TR: Total MR: Marginal TP: Total, run Marginal Revenue Revenue Profit Cost Profit Average MP: Profit Margin Logical Formula TVC+TFC TFC/ Q TVC/Q *585*0 Excel Formula for 200 units > C8/A8 D8/A8 or | O 100 200 300 400 500 600 700 800 900 1000 | 6000 12000 15000 21000 33000 48000 65000 83000 102000 123000 158000 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 9000 15000 27000 42000 59000 77000 96000 117000 152000 *Change in TP/ TC/Q *Change in TC/ *Change in TR/ TR-IC TP/Q Change in Q Change in Q change in Q AFC+AVC MR-MC B8/A8 (K8-K7)/(A8-A7) (B8-87)/(A8-A7) A8*300 (18-17)/(A8-A7) 18-58 K8/A8 E8+F8 J8-H8 | Infinity NA O NA -6000 Infinity 120.0 60.0 8500 85.01 - 3500 35.0 25.01 L 75.0 30.0 17000 85.0 2000 10.0 55.0|| 70.00 60.00 25500 85.0 45001 15.0 25.0 82.5 120.0 34000 85.0 1000 2.5 -35.0 96.0 150.0 42500 85.00 -5500 -11.00 -65.0 108.3 170.00 51000|| 85.01 - 14000 -23.3 -85.0 118.6 180.0 59500 85.0 -23500 -33.6 -95.0 127.5 190.0 68000 85.0 - 34000 -42.5 -105.0| 136.71 210.0 76500 85.00 -46500 -51.7 -125.0| 158.0 350.00 85000 85.0 -73000 -73.0 -265.00 Infinity 60.0 30.0 20.0 15.0 12.0 10.0 8.6 8.6 7.5 6.7 6.7 6.0 NA 60.0 45.0 50.0 67.5 84.0 98.3 110.0 120.0 130.0 152.0

Manager should produce 300 units, as beyond that profit margin is negative.