Question

Problem 16-1 (Algo)

A delivery company is considering adding another vehicle to its delivery fleet; each vehicle is rented for $350 per day. Assume that the additional vehicle would be capable of delivering 1,750 packages per day and that each package that is delivered brings in $0.35 in revenue. Also assume that adding the delivery vehicle would not affect any other costs.

Instructions: Round your answers to 1 decimal place.

a. What are the MRP and MRC?

Should the firm add this delivery vehicle?  (Click to select)  Yes  No

b. Now suppose that the cost of renting a vehicle doubles to $700 per day. What are the MRP and MRC?

Should the firm add a delivery vehicle under these circumstances?  (Click to select)  Yes  No

c. Next suppose that the cost of renting a vehicle falls back down to $350 per day but, due to extremely congested freeways, an additional vehicle would only be able to deliver 750 packages per day. What are the MRP and MRC in this situation?

Would adding a vehicle under these circumstances increase the firm’s profits?

Answer 1

Part A

MRP is price of one additional unit

MRC is cost of one additional unit

Part A

MRP = 1750*0.35 = $612.50

MRC = $350

Yes, as MRP > MRC, the firm should add this delivery vehicle.

Part B

MRP is price of one additional unit

MRC is cost of one additional unit

Part A

MRP = 1750*0.35 = $612.50

MRC = $700

No, as MRP < MRC, the firm should not add this delivery vehicle.

Part C

MRP is price of one additional unit

MRC is cost of one additional unit

Part A

MRP = 750*0.35 = $262.50

MRC = $350

No, as MRP < MRC, a vehicle would not be adding under these circumstances increase the firm’s profits.