1. Quikpak sells returnable containers to major food processors. The price received for the containers is 2 per unit. Of this amount 1.25 is profit contribution. Quikpak is considering an attempt to differentiate its product through quality improvement at a cost of 5p. per unit. Current profits are 40,000 on sales of 100,000 units.

a. Assuming that average variable costs are constant at all output levels, find Quikpaks total cost function before the proposed change.

b. Calculate the total cost function if the quality improvement is implemented.

c. Calculate Quikpaks break-even output before and after the change, assuming it cannot increase its price.

d. Calculate the increase in sales that would be necessary with the quality improvement to increase profits to 45,000.

2. Two business students are considering opening a business selling hamburgers next summer. The students view this as an alternative to taking summer employment with a local firm where they would each earn 3,000 during the three-month summer period. It would cost 2,000 to obtain a licence to operate their stand, 1,000 per month to rent the stand with the necessary equipment and 100 per month for insurance. Petrol costs are estimated at 10 per day. Hamburger meat can be bought for 4.00 per kilo and buns cost 1.20 per dozen. The burgers would sell in 125 gram patties for 1.50 each.

a. Find the accounting cost function for the proposed business.

b. Find the economic cost function for the proposed business.

c. Calculate the level of output where the business would make normal profit.

d. Cheese slices for the burgers can be bought for 2.40 for twenty slices and it is estimated that 30 per cent of customers would ask for the cheeseburgers, with these selling for 1.95. Calculate the effect of this on the output necessary to make normal profit.

e. If the students can sell 150 burgers a day, 30 per cent with cheese, estimate the economic profit they would make. Advise them whether they should enter the business.