A QUICK EXAMPLE ON NESTED MARGINAL ANALYSIS

You have been retained as a consultant by a business that is considering production of a 10

products in three corporate divisions. For each product, you are given the price and quantity sold

per month for each product the unit variable cost for each product and the fixed cost for producing

each product. The "Product Fixed Cost" must be born if the product is produce that month

DivisionProduct LinePriceQuantityProduct Unit Var CostProduct Line Fixed Cost

1 1 11 20 5 20

1 2 13 10 3 20

1 3 4 5 250

2 4 14 10 4 10

2 5 4 10 3 30

2 6 4 10 2 140

2 7 8 20 450

38 12 7 2 35

3 9 7 1 0 5 10

3 10 13 5 3 15

In addition, you are told that each division has a "divisional overhead" of $100 that must be born

if the division produces ANY products in a given month. Finally, there is a $75 "corporate

overhead" that must be born each month, if the company stays in business.

(1) Conduct an analysis to determine which products to retain, which divisions to retain and

whether company should remain open.

(2) What if you were told that product line 2 & 3 were complements so that one good can only

be sold if the other good is also available. How would that impact your analysis?