Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Problem 1. Bike Production You are managing a firm that produces bicycles for the low-quality retail market. You are currently operating at full capacity for
Problem 1. Bike Production You are managing a firm that produces bicycles for the low-quality retail market. You are currently operating at full capacity for a single shift. Output is 10,000 bikes per year. Competition in this market is erce and prices are typically dictated by large retail stores you can thus think of your firm as a price taker. The price obtainable for your bikes is $50. Your firm's costs at the current level of output are as follows: Labor: $20.00 per bilte Raw materials: $10.00 per bilte Fixed costs: $250,000 (annualized) Shutting down the firm (and avoiding the fixed costs) is not an option. You discuss the option of adding a second shift, to produce an extra 10,000 bikes per year. The production manager advises you that fixed costs will not be affected by adding a second shift. The personnel department advises that the second shift would cost 20% more in terms of labor than the first shift because of the need to pay a premium to these night shift workers. The VP of Procurement tells you that doubling the size your raw material inputs would not change their prlce. a) What is the marginal cost per bike of the added output? TC: 250,000+ b) What is the marginal revenue per bike for the added output? c) Would you, as general manager, expand production? Explain. [A quantitative answer is not required] d) If shutting down becomes an option, would you do so? Give a response for both the smaller and larger production volumes
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started