Question

Last Problem: A major car company has developed the following equations relating the selling price, quantity sold and cost to produce a new model of hybrid car. S= (-3x10-7Q2 - 0.06Q + $18000 C = ($16,000)Q + $50,000,000 Where S is the selling price in $/car, Q is Quantity of cars sold, and C is cost to produce and sell Q cars. a) Does the equation for the selling price seem reasonable? Justify why or why not. b) What is the fixed cost associated with producing the car? c) Give 3 examples of things that might be included in the variable costs of producing a car. d) To maximize profit, determine the quantity, Q, the company should try to produce and sell. What should the selling price be? e) What is the minimum number of cars you'd have to sell to break even? f) If you were the CEO, would you invest $50,000,000 in a new production facility to launch this line of cars?

Answer 1

Ans:
A)	Assume Q=10 car
	S='=(-3/10000000)*10*10-.06*10+18000 =17999.39997
	C='=16000*10+50000000 =50160000
	equation for selling price does not seems reasonable, as veriable cost per unit is $16000 and fixed cost is
	$50,000,000, and selling price comes to approx $18000/car only, which is not logical at all as it hardly covers variable cost.
B)	Fixed cost is $50,000,000,
C)	Three Example:1) Direct raw materis like alluminium, 2)Direct labour & 3) direct gas & electricity expenses
D)	as fixed cost is very huge i.e $50,000,000, assuming the contribution in car industry is around 70%
	then selling price/car comes to varieable cost/(100-contribution) i.e 16000/30% equals to $ 53333 approx.
	The Q need to be much more than $50,000,000/(selling price-variable cost)
	=$50,000,000/(selling price-variable cost)=$50,000,000/37333=1340 units approx
E)	Break even would be 1340 units approx
F)	No, first I would try to maximise the utilisation of current capacity to absorb the high fixed cost, then if there is enough demand then i would go for expantion.