If demand should increase to production capacity, which alternative would be more feasible? Explain
Write Cost of the Firm Paper
Dem and Greg’s pop-tarts company is doing well, especially with the introduction of Will’s Power Tarts. After some further experimentation in the test kitchen, they improved the taste of their pop-tarts. Then, Greg test-marketed the new product in the three major markets: Washington DC, New York City, and Los Angeles. His results revealed that people wanted tutti fruitti pop-tarts and Power Tarts. Sales would average 10,000, 5,000, and 2,000 bars a week in Washington DC, New York City, and Los Angeles, respectively. They hired you again for further analysis and you propose the following two alternatives:
I. Construct a single plant in to make the tutti fruitti pop-tarts and Power Tarts. The plant has the capacity to make 20,000 bars a week at a fixed cost of $5,000 per week and variable costs of 70 cents per bar.
II. Construct 3 plants (one in each market) with weekly capacities of 12,000, 6000, and 3,000 bars with weekly fixed costs of $4,000, $3000, and $2000 and weekly variable costs of 60 cents per bar (lower variable costs than alternative 1 because of less shipping costs).
Answer the following questions: in an APA formatted paper:
- What are the possible fixed costs and variable costs that may be associated with this firm?
- Which alternative should they select? Why?
- If demand should increase to production capacity, which alternative would be more feasible? Explain.
- Suppose in alternative II that variable costs increases to 70 cents. Which alternative would they select? Why?
- For alternative I suppose that the price of the pop-tarts and Power Tarts is $2.00. Would they make a profit or a loss? Apply the same price to alternative II and determine if there is a profit or a loss for each market.