The California Instruments Corporation, a producer of electronic equipment, makes pocket calculators...

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The California Instruments Corporation, a producer of electronic equipment, makes pocket calculators in a plant that is run autonomously. The plant has a capacity output of 200,000 calculators per year, and the plant's manager regards 75 percent of capacity as the normal or standard output. The projected total variable costs for the normal or standard level of output are $900,000, while the total overhead or fixed costs are estimated to be 120 percents of total variable costs. The plant manager wants to apply a 20 percent markup on cost. a. What price should the manager charge for the calculators? b. If the price set is the profit=maximizing price, what is the price elasticity of demand for calculators faced by the plant? c. If the price elasticity of demand were 24, what would be the optimum markup on cost that the manager should apply? d. If during the year the plant manager receives an order for an additional 20,000 of its calculators from a school system to be delivered in four months for the price of $10, should the manager accept the order? e. If California Instruments wants to add the pocket calculator to its own product line, what should be the transfer price of the pocket calculators? f. Suppose that in the future the plant will sell pocket calculators to the marketing division of California Instruments and on the external imperfectly competitive market, where the price elasticity of demand is Ep = -2. What would be the net marginal revenue of the marketing division of the firm for the pocket calculators? At what price should the calculators be sold on the external market?

David · Accepted Answer

The California Instruments Corporation, a producer of electronic equipment, makes pocket 
calculators in a plant that is run autonomously. The plant has a capacity output of 200,000 
calculators per year, and the plant's manager regards 75 percent of capacity as the normal or 
standard output. The projected total variable costs for the normal or standard level of output are 
$900,000, while the total overhead or fixed costs are estimated to be 120 percents of total variable 
costs. The plant manager wants to apply a 20 percent markup on cost.  
a. What price should the manager charge for the calculators?  
Answer: 
Suppose markup on cost is defined as;  
Markup on cost = (P-MC)/MC 
Capacity = 200000 and 75% of capacity is taken as normal output 
So normal output = 75%*200000 = 150000 
Total variable cost for normal output is given as: TVC = 900000 
So average variable cost = 900000/150000 = $6 
Assuming that the cost function is linear, so average variable cost = marginal cost (MC) = $6 
Given markup on cost = 20%, we can write 
(P-6)/6 = 0.20, implies P = $7.

The California Instruments Corporation, a producer of electronic equipment, makes pocket calculators in a plant that is run autonomously. The plant has a capacity output of 200,000 calculators per...

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