Learning Outcomes

The learner will be able to:

Given a specific business situation, calculate the point of profit maximization in the short term.

Show how the profit maximizing firm responds in the long run as the costs of one or more of the inputs changes.

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 or PDF format will be returned unmarked. Assignments that are emailed will not be accepted.

A company produces gold picture frames. The cost per picture frame is:

Materials $9

Packaging $1

Decorations on the frame $5

Shipping and handling $1.5

Each worker earns $30,000 annually in salary and benefits. The number of workers changes based on the level of production. This means this is a variable cost.

The artist who creates the designs on the picture frames is paid $25,000 annually. Senior management are paid a total of $200,000 annually. Other annual costs are:

Taxes and Insurance $17,000

Utilities $50,000

Rent $300,000

Miscellaneous Overhead Expenses $24,000

The following production is possible:

No. Of Workers

0

1

2

3

4

5

6

7

No. Of Picture Frames that can be made

0

12,000

21,000

35,000

50,000

65,000

73,000

71,000

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

12000

2

21000

3

35000

4

50000

5

65000

6

73000

7

71000

MC

TC /Q

2. What is the lowest price you would be willing to start producing this new product? Be precise. Don't round up to the nearest dollar.(1 mark)

If you were already committed to the fixed costs, how low could the price per picture frame fall before you would consider shutting down production? Remember, in the SHORT RUN, you have to keep paying your fixed costs whether you produce any picture frames 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)

For Questions 4 to 7, you need to fill in the table for each question. You need to STATE how many workers, the level of production and the profit you will make.Your costs, quantities and # of workers will be the same as you calculated in Question 1.

1. If the price per picture frame was fixed at $35, 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. You need to calculate total revenue and profit or loss for each level as you are given the average revenue. Remember to state both what level of production you would choose and what dollar profit you would make. (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 picture frame was fixed at $26.50, what would you do in the SHORT RUN? Again, remember that you have to keep paying your fixed costs in the short run. Fill in the table completely and state what level of production you would use. State what is your profit at this level?(1 mark)

# of Workers

PxQ

price

FC + VC

Profit or Loss

TR

AR

Q

TC

TP

0

1

2

3

4

5

6

7

1. If the price per picture frame were fixed at $18.60, what would you do in the SHORT RUN? Fill in the chart and state what level of production you would use.(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 picture frame at the prices indicated, how many picture frames would you produce and what would be your profit? Fill in the chart.(1 mark)

# of Picture Frames

12000

21000

35000

50000

65000

73000

71000

Price (AR)

$40

$38

$36

$33

$30

$28

$26

# of Workers

TR

AR

Q

TC

Profit or Loss (TP)

0

1

2

3

4

5

6

7