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:

  1. What are the possible fixed costs and variable costs that may be associated with this firm?
  2. Which alternative should they select? Why?
  3. If demand should increase to production capacity, which alternative would be more feasible? Explain.
  4. Suppose in alternative II that variable costs increases to 70 cents. Which alternative would they select? Why?
  5. 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.