Two competitors each began producing and selling the same product last year. In both cases the cost of the first unit was $300. Firm A’s managers were uncertain about the future of the product, so they sold each unit for actual cost plus a 50% markup for profit. Firm B’s managers were confident that the product would be a success. They expected to sell 100 units of the product over its life. The managers set their selling price at the average cost to produce 100 units plus a 50% markup.
The production of this product is mostly labor and subject to an 85% learning rate. Last year firm A sold 5 units of the product, while firm B sold 150 units (more than initially anticipated).
This year, firm A’s managers decided to match firm B’s selling price set last year. Meanwhile, firm B’s managers anticipated selling another 150 units. Therefore, they calculated the average cost to produce the second group of 150 units and set their current year price at this year’s average cost plus a 50% markup. At the end of this year, firm A sold only 10 units, while firm B sold 150 units.

Calculate net income for the two firms for this year and last year.

  • CreatedJanuary 26, 2015
  • Files Included
Post your question