Exam 11: Topics in Pricing and Profit Analysis

Use the following information to answer Questions 7, 8 and 9 A company that produces diet supplements that uses a highly automated packaging process has the following production and revenue alternatives for three products A, B, and C) that are feasible to produce with existing plant and equipment. Total revenue is in thousands of dollars per month. Total cost for the first shift is $200,000 per month - of which $120,000 is labor, $60,000 is other variable costs, and $20,000 is fixed cost. As the number of shifts is increased, fixed cost remains at $20,000 per month while variable costs other than labor remain the same per shift. For the second shift, labor must be paid 1.2 times the amount paid on the first shift. For the third shift, labor must be paid 1.4 times what it receives in the first shift. -What is the total monthly cost if the firm uses two shifts?

In a joint product problem with products produced in fixed proportions, profit would be maximized where MR_A + MR_B = MC, provided that neither MR_A nor MR_B is negative.

Where there is a perfectly competitive external market for a transfer product, the profit maximizing condition for the transfer product division is:

Third-degree price discrimination is the practice of dividing groups of purchasers into separate markets and charging different prices in each market.

Use the following information for Questions 14 and 15 QC Electronics produces small, hand-held calculators. The final product division of the company manufactures all parts of the calculator except the display unit, and then assembles, packages and distributes the product. The display units of the calculators are produced by a separate division of the firm called View Displays. View Displays could sell the display units in the open market to a number of other manufacturers at a standard price of $.25. There is vigorous competition in the display unit industry and it is unlikely that any but the going price can be obtained. Management has determined that the demand curve for quantity sold per month of the hand-held calculators is: Q_c = 12,500 - 2000P_c, so that MR_c = 6.25 - .001Q_c) while QC's marginal cost for hand-held calculators, excluding the cost of the display module is: MC_c = .005Q_c In addition, management has determined that the marginal cost for the display modules is: MC_d = .0005Q_d -The firm will maximize profit at what price?

Tracey Biogenetics, Inc purchases anti-snoring devices from a manufacturer in China and distributes them to retail stores throughout the United States. Tracey's management has estimated that within the range of feasible prices for the devices, the elasticity of demand of the retail stores is -2.0. If Tracey can obtain any quantity of devices from the manufacturer for a fixed price of $8, what price should it charge for its anti-snoring devices?

Use the following information for Questions 10, 11 and 12 A company that produces breakfast cereal using a highly automated packaging process has the following production and revenue alternatives for three products A, B, and C) that are feasible to produce with existing plant and equipment. Total revenue is in thousands of dollars per month. Total cost for the first shift is $90,000 per month - of which $60,000 is labor, $20,000 is other variable costs, and $10,000 is fixed cost. As the number of shifts is increased, fixed cost remains at $20,000 per month while variable costs other than labor remain the same per shift. For the second shift, labor must be paid 1.3 times the amount paid on the first shift. For the third shift, labor must be paid 1.5 times what it receives in the first shift. -What is the monthly total cost if the firm uses two shifts?

A company that produces diet supplements using a highly automated packaging process has the following production and revenue alternatives for three products A, B, and C) that are feasible to produce with existing plant and equipment: TR is in thousands of dollars per month. Total cost for the first shift is $200,000 per month - of which $120,000 is labor, $60,000 is other variable costs, and $20,000 is fixed cost. As the number of shifts is increased, fixed cost remains at $20,000 per month while variable costs other than labor remain the same per shift. For the second shift, labor must be paid 1.2 times the amount paid on the first shift. For the third shift, labor must be paid 1.4 times what it receives in the first shift. a. Determine total cost for the two-shift and three-shift alternatives. b. Indicate the product combination and shift level that maximizes profit.

In order to practice third-degree price discrimination, the market segments must be kept apart.

Markup on cost is the proportion of the selling price that represents an amount added to the cost of goods sold.

Second-degree price discrimination is the practice of charging successively lower prices for block type increases in quantity purchased.

Jasper's is a home cleaning company that specializes in cleaning pet odors and other residual effects of pet ownership. Their primary customers consist of homeowners who own pets and do not want to let Fido's little "deposits" take over the house Type H) and/or yard Type Y). Both types of customers would purchase both services if they were attractively priced. The maximum amount each type of customer would pay per house and yard cleaning appear on the following table. Where: Jasper's is considering offering its services only as a bundle consisting of both house and yard cleaning. Given the preceding data, what price will the company charge to bundle?

The separation of buyers into distinct markets characterized by different prices is:

Use the following information for Questions 10, 11 and 12 A company that produces breakfast cereal using a highly automated packaging process has the following production and revenue alternatives for three products A, B, and C) that are feasible to produce with existing plant and equipment. Total revenue is in thousands of dollars per month. Total cost for the first shift is $90,000 per month - of which $60,000 is labor, $20,000 is other variable costs, and $10,000 is fixed cost. As the number of shifts is increased, fixed cost remains at $20,000 per month while variable costs other than labor remain the same per shift. For the second shift, labor must be paid 1.3 times the amount paid on the first shift. For the third shift, labor must be paid 1.5 times what it receives in the first shift. -What is the total monthly cost if the firm uses three shifts?

A firm produces two products, x and y, and the production process is such that one unit of x is always obtained with one unit of y. If the demand curves for x and y are estimated to be: Q_x = 85 - P_x so that MR_x = 85 - 2Q_x) Q_y = 110 - P_y so that MR_y = 110 - 2Q_y) and the marginal cost of production is MC = 25 + .25Q_j, where Q_j consists of one unit of each product, how much of product x and product y should the firm sell in order to maximize profit?

When a firm is practicing price discrimination in two markets, the profit maximizing condition is met at MR_A + MR_B = SMC.

Where there is a perfectly competitive external market for a transfer product, the final product division should pay the transfer product division a price:

Bundling is a pricing strategy whose principal characteristic is that it offers a buyer a package consisting of two or more goods that is more attractive than the alternative of buying the goods separately.

Use the following information for Questions 14 and 15 QC Electronics produces small, hand-held calculators. The final product division of the company manufactures all parts of the calculator except the display unit, and then assembles, packages and distributes the product. The display units of the calculators are produced by a separate division of the firm called View Displays. View Displays could sell the display units in the open market to a number of other manufacturers at a standard price of $.25. There is vigorous competition in the display unit industry and it is unlikely that any but the going price can be obtained. Management has determined that the demand curve for quantity sold per month of the hand-held calculators is: Q_c = 12,500 - 2000P_c, so that MR_c = 6.25 - .001Q_c) while QC's marginal cost for hand-held calculators, excluding the cost of the display module is: MC_c = .005Q_c In addition, management has determined that the marginal cost for the display modules is: MC_d = .0005Q_d -The firm will maximize profit at what quantity?

The pricing technique whereby a certain percentage of cost of goods sold or of price is added to the cost of goods sold in order to obtain the market price is called: