Question

Sunder manufactures hard rubber pet toys. The purple dog chewy has a variable cost of $ 3.00 per unit. It is produced on a machine that is leased. The three models of this machine have three different capacities.
Maximum Daily Capacity (Units) Daily Lease Cost
1,000................ $ 10,000
1,200................ 10,800
1,400................ 11,200
The daily market demand for purple dog chewies at various prices is:
Price Daily Quantity Demanded
$ 16.11 .......... 900
15.00 .......... 1,000
14.18 .......... 1,100
12.83 .......... 1,200
12.23 .......... 1,300
11.50 .......... 1,400
There is no uncertainty (daily variation) with respect to the daily demand for purple dog chewies. For example, if the price is set at $ 14.18, 1,100 chewies will be sold every day with certainty.

Required:
a. Given all the data, how many purple dog chewies should Sunder produce and sell? ( Show calculations, neatly labeled.)
b. Suppose Sunder has the policy of not charging fixed costs to products whenever excess ca-pacity exists. The manager of purple dog chewies receives a bonus based on the accounting profits from purple dog chewies. This manager has private knowledge of machine capaci-ties, lease fees, and the demand for purple dog chewies, as well as the decision rights over how large a machine to lease. How big a machine will the manager lease and how many chewies will be produced and sold? (Show calculations, neatly labeled.)
c. Comment on Sunder’s policy of not charging fixed costs to products whenever excess capacityexists.


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  • CreatedDecember 15, 2014
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