3.5 Brunswick manufactures its Life Cycle fitness equipment at six factories in the United States. Say that
Question:
3.5 Brunswick manufactures its Life Cycle fitness equipment at six factories in the United States. Say that you are a manager at a company like Brunswick. For simplicity, assume that your firm produces only one style of fitness equipment, an exercise bike, and that you produce it at three plants, all of which have identical costs. The table presents the costs at one of the plants. The second column includes all of the costs except the cost of transporting the bikes to the purchasers, which the table presents in the third column as the shipping costs. Suppose that your firm is a perfect competitor and the market price is $500 per bike after delivery.
a. What quantity of exercise bikes maximizes your firm’s profit? At this quantity, what is the profit per plant, and what is your firm’s total profit?
b. You are deciding whether to build a fourth plant. A fourth plant has no effect on the shipping costs, and once the new plant is built, all four plants will have identical costs. Adding a fourth plant creates managerial diseconomies that raise the costs of production by $1,000 at each quantity in the table at all four plants. If your firm adds a fourth plant, what quantity of exercise bikes maximizes profit? What is the profit for each of the four plants, and what is the firm’s total profit? Should you approve building the plant? Why or why not?
c. Now assume that, as in part b., building the fourth plant creates managerial diseconomies that raise the costs of production by $1,000 at each quantity in the table at all four plants. However, also suppose that the fourth plant cuts the cost of shipping in half at all four plants. What quantity of exercise bikes now maximizes your firm’s profit? What is the profit per plant and your firm’s total profit? With this revised scenario, should you approve building the fourth plant? Why or why not?
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