Nov 26, 2020 in

Week 2 Assignment 2

Answer to Question 1.

Assumption 1: Variable costs are considered linear with respect to the output.

Assumption 2: Advertising and Travel are considered as fixed costs.

 Total Variable Cost per Unit Total Fixed Costs Items Total unit Cost for total unit Cost for one unit Items Fixed costs Materials 100,000 180,000 1.8 Manufacturing 45,000 Labor 100,000 225,000 2.25 Advertising 10,000 Delivery 100,000 30,000 0.3 Travel 5,000 Commissions 100,000 50,000 0.5 Admin 15,000 Total Variable Cost per Unit 4.85 Total fixed cost 75,000
 Profit calculation for various combinations Price Quantity Total Revenue Variable cost per unit Total Variable Cost Total Fixed Cost Total Cost Profit 8.00 65,000 520,000 4.85 315,250 75,000 390,250 129,750 7.75 75,000 581,250 4.85 363,750 75,000 438,750 142,500 7.50 80,000 600,000 4.85 388,000 75,000 463,000 137,000 7.25 90,000 652,500 4.85 436,500 75,000 511,500 141,000 7.00 100,000 700,000 4.85 485,000 75,000 560,000 140,000 6.75 115,000 776,250 4.85 557,750 75,000 632,750 143,500 6.50 120,000 780,000 4.85 582,000 75,000 657,000 123,000

Answer to Question 2.

Production costs and sales revenue relationships are associated with four variables: fixed cost, variable cost, total cost, and sales revenue. Graphically this concept is displayed in Break-even point vs. Total sales. We used Golden Star Winery sales revenue data to plot this graph. The point of intersection of the total cost and sales revenue curves is called break-even point (Ready Ratios). This is displayed in the said graph. The break-even point denotes that values of cost and revenue from sales are even. In other words, there is a loss and no profit. The formula for calculation of break-even point is Break-even point = Fixed cost x (Sales price Variable cost per unit).

For current sales price \$7 per unit the break-even point is

Break-even point = 75,000 (7 4.85) = 34,884 units. The cost and revenue are \$244,186. It is shown in Figure 1. We inform the winery that if they produce less than 34,884 units at sales price \$7 per unit then the company will sustain losses (See Figure 1).

Figure 1. Break-even point at sales price \$7 per unit.

Answer to Question 3.

The concept of elasticity is a numerical value that expresses the relative response of one variable to the changes in another variable (Amos Web n.d.). In this case, we have two variables: sales price and quality sold. Through elasticity coefficient we can study the impact of demand on the price increase or decrease. This is called price elasticity of demand.

It is expressed as,

Coefficient of demand elasticity = Percent change in quantity demanded / Percent change in price, or Ed = ? Qd / ? Pd.

This assignment evaluates price elasticity of demand of Golden Star Winery product.

 Price Quantity Elasticity 6.50 120,000 6.75 115,000 2.45 7.00 100,000 3.41 7.25 90,000 3.22 7.50 80,000