Humber Univ BECN 150 Assignment 3 Winter 2015

Assignment Name: Assignment 3

Contact: Instructor via Blackboard Mail

Due Date: See Critical Path Document

Learning Outcomes

The learner will:

Given a specific business situation, calculate the point of profit maximization in the short term. Further, show how the profit maximizing firm responds in the long run as the costs of one or more of the inputs changes. There is an example of what is expected in the Learning Activities for this section.

Instructions

1. Complete the exercises below, answering all questions. In this exercise you are trying to maximize profits (or minimize losses). Don’t forget to answer the questions as well as create the table.

2. Submit the assignment in a WORD document using the Assignment Submission feature. Assignments not submitted as a Word document will not be accepted. Assignments submitted in Excel will be returned unmarked. Assignments that are emailed will not be accepted.

A company produces hoodies. The cost per hoodie is:

Material $10

Thread $1

Decals - design $2

Packaging $1

Shipping $5

The artist who creates the designs on the hoodies is paid $8,000 annually. The other annual costs are:

Taxes and Insurance $15,000

Utilities $30,100

Rent $131,000

Miscellaneous Overhead Expenses $52,500

Management Salary $200,000

Each worker costs $25,000 per annum in salary and benefits.

The following production is possible:

No. Of Workers	0	1	2	3	4	5	6	7
No. Of Hoodies that can be made	0	6500	15,000	20,000	33,500	42,500	48,000	47,000

1. Using all this information complete the following table and answer the questions. It would be easier if you set this up in an Excel spreadsheet. When you are done, you must submit it as a Word document with your answers.You will use this table to answer questions 2 and 3. (4 marks)

Your first step is to identify which are fixed costs and which are variable costs. If you will have to keep paying the cost whether you produce 0 units of the product or 10,000 units, then it is a fixed cost. In the short run you have to keep paying it. In the long run you may be able to change these fixed costs. A variable cost changes based on how much of the product you produce. But the variable costs may not change all at the same time.

# of workers	Q	TVC	AVC	AFC	TC	ATC
			TVC / Q	FC / Q	FC + VC	TC/Q
0	0
1	6500
2	15000
3	20000
4	33500
5	42500
6	48000
7	47000

MC

?TC /?Q

2. What is the lowest price you would be willing to start producing this new product? (1 mark)

3. If you were already committed to the fixed costs, how low could the price per hoodie fall before you would consider shutting down production? Remember you have to keep paying your fixed costs whether you produce any hoodies or not.If you can cover your variable costs, then anything over that will reduce your fixed costs. You may be losing money in the short run but you are losing less money.(1 mark)

4. If the price per hoodie were fixed at $30, what would you do? Remember, in the short run you can’t alter fixed costs, you can just decide where to set the level of production. Your costs, # of workers, and quantities are the same as you have already calculated, so when filling in these tables for Q 4, 5, 6 and 7, use the same costs. You just need to calculate total revenue and profit or loss as you are given the average revenue. Remember that you have to keep paying your fixed costs in the short run. (1 mark)

# of Workers	PxQ	price		FC + VC	Profit or Loss
	TR	AR	Q	TC	TP
0
1
2
3
4
5
6
7

5. If the price per hoodie were fixed at $80, what would you do? Again, remember to state what level of production you would choose. (1 mark)

# of Workers	PxQ	price		FC + VC	Profit or Loss
	TR	AR	Q	TC	TP
0
1
2
3
4
5
6
7

6. If the price per hoodie were fixed at $15, what would you do? Again, remember to state what level of production you would choose. (1 mark)

# of Workers	PxQ	price		FC + VC	Profit or Loss
	TR	AR	Q	TC	TP
0
1
2
3
4
5
6
7

7. If marketing data showed you could sell the following number of hoodies at the prices indicated, how many hoodies would you produce and what would be your profit? (1 mark)

# of Hoodies	6500	15000	20000	33500	42500	48000
Price (AR)	150	140	120	100	80	$50

# of Workers	TR	AR	Q	TC	Profit or Loss (TP)
0
1
2
3
4
5
6
7