Fixed & Variable Cost Output.......
Wine Output(.75-Liter Bottles)
10,000 Bottles ///// 15,000 Bottles //// 20,000 Bottles
Variable production costs…
$35,000 //////// 52,500 ////////// 70,000
Fixed production costs…...
100,000 //////// 100,000 ////////// 100,000
Variable selling and administrative costs...
2,000 ////////// 3,000////////// 4,000
Fixed selling and administrative costs..
40,000 ///////// 40,000////////// 40,000
Total……
$177,000 //////// $195,000 ////////// $214,000
Wine Sales
10,000 Bottles ///// 15,000 Bottles ///// 20,000 Bottles
Sales price per .75-liter bottle…
$18.00 ///// 15.00 ///// $12.00
1. Can anyone Calculate the unit costs of wine production and sales at each level of output. and At what level of output is the unit cost minimized?
Answers:
Production cost of 10000sales category= 177000/10000=17.7
,, 15000 ,, = 195000/15000=13
,, 20000 ..,, = 214000/20000=10.7
Profit/bottle from the three sales
10000 sales = 18-17.7=0.3
15000 sales = 15 -13 = 2
20000 sales = 12 - 10.7 = 1.3
Cost is minimised at the 20000 bottle sale or output.
The break even point is = Sales - Variable cost - Profit/unit fixed cost
Unit fixed cost = 140000/10000=14 since unit fixed cost is not given.
So breakeven point is 10000
Your question is little hazy since you are marking up the product where as this is done for 'marginal pricing'. Your sales price should be equal to variable cost + fixed cost. So the selling price of each product can only be 14+3.7=17.7
In this way the first sales unit output produces no profit.
second produces 14 x 5000 = 60000 profit and the third category 14x10000=140000 profit.
Sales at each level of out put cannot be calculated since sales is dependent on price not level of out put.
Insights:
The above contention is explained as follows. The demand and supply curve has an equilibrium point. It is the point where the marginal utility of consumption peaks and then comes down. So it forms a 'montone function' which is like a second order curve starting at the initial supply point and end at the final deman point. The line joining these points form a convex set.
The solution to this is difficult since it is non linear dynamics. So simulation is performed on the initial conditions or boundary values which are the demand and supply begining and end points.
Either you use this method to find the equilibrium solution or solve the monotone function by some other method.
This is why you need boundary conditions and your data won't suffice to find the different sales points for different outputs.
Also, in freemarket welfare economies the priciing is marginal pricing or if one exports then transfer pricing. So markups can be used like you did only for external markets and for internal markets you should use marginal pricing which is variable cost + fixed cost. You reach a break even point any sale beyond this will start producing profit which is fixed cost per produt times the additional sales made after breakeven point.
Sometimes even discounts are given on points beyond breakeven which is competitive strategy. Here the profit even if it is there will lesser than the peak. Then you can sell more at low prices.
So pricing is either marginal for internal markets and transfer pricing for external markets.
Just add up your costs at each level and then divide by the number of bottles. That's your unit cost. Multiply the number of bottles by the sales price and that's your sales level. Pick the lowest cost and that's where it's minimized.
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