Question

a) Accomack Inc. manufactures tool dies, including dies B6 and B7. The plant where the dies are made is experiencing a problem with its inspection department and can only spend a limited amount of time each week inspecting these dies (the company hopes to fix the problem but is stuck with the constraint for now). Each B6 die requires 10 minutes to inspect, while each B7 die requires 15 minutes for inspection. Currently, Accomack is producing 110 B6 and 140 B7 dies per week. Inspection costs $37 per hour to do. Other costs include $4360 per week in fixed costs, $12 per die in variable costs for B6, and $13 per die in variable costs for B7. Fixed costs are allocated to the dies based on units produced. B6 sells for $23 per die, and B7 sells for $27 per die. Assume that inspection time is fully utilized. Calculate the shadow cost of an hour of inspection time (round to nearest cent, e.g. 33.33).

b) Briefly explain why it is relevant that inspection time is fully utilized in the prior question. Limit answers to 25 words.

c) Ignore the information in question 1 and now assume the shadow cost is $48 per hour. For B7, assume allocated fixed costs of $1770 and variable costs of $12 per unit. B7 uses 0.17 hours of inspector time per unit and has a demand curve of V = 1000 - 25P.

What is the optimal price to charge for B7? The answer must be rounded to cents (eg, 39.25).

Answer 1