Question

Cliff’s Cams (CC) makes cams (surprise!). The average production cost per cam is estimated at $40 + 15/2x (where x is the number of cams produced and sold). CC can currently sell 20 cams at $80 each. What is the current profit of the firm? What is the marginal cost of producing one more cam? If a new buyer offers to buy an additional 10 cams at $60 each, then what is the new firm profit? What if our current customers then demand the same discount, what is firm profit?

Answer 1

Solution:

a)Calculation of current profit

Cost of producing 20 cams=[$40+(15/2*20)]*20

=$807.50

Current profit=Sale revenue-Cost

=($80*20)-$807.50

=$792.50

b)Calculation of marginal cost of producing 1 unit

Marginal cost=Change in total cost/change in total quantity

Lets calculate the marginal quantity assuming 19 units and 20 units

Total cost at 19 units=[$40+(15/2*19)]*19

=$767.50

Total cost at 20 units=$807.50

Marginal cost of producing 1 unit=($807.50-$767.50)/20-19

=$40

c)Calculation of profit

Total unit produced=20+10=30 units

Total cost=[40+(15/2*30)]*30

=$1207.50

Total sales revenue=20*$80+10*$60

=$2200

Profit=$2200-$1207.50

=$992.50

d)Calculation of profit,if sale price on total quantity is $60

Total sales revenue=$60*30=$1800

Total Cost=$1207.50

Profit=$1800-$1207.50

=$592.50