Bags Fixed Cost Variable Cost Total Cost ✓ Solved

Bagsfixed Costvariable Costtotal Cost01700 1700100170050022

Given the above information on cost, if you charge $15 per entry, what is the breakeven quantity of bags that you should order? Orders must be placed in blocks of 100 bags. Please select any/all viable approaches below:

• Use the profit maximizing rule, MR ≥ MC, buy 300 bags.
• Use the profit maximizing rule, MR ≥ MC, buy 200 bags.
• Use Qb = F / (MR - AVC) where Qb is the breakeven quantity to be determined, the optimal quantity of bags is 300.
• Use Qb = F / (MR - AVC) where Qb is the breakeven quantity to be determined, the optimal quantity of bags is 200.

Sample Paper For Above instruction

Determining the optimal order quantity and breakeven point is a fundamental aspect of managerial decision-making, particularly in the context of cost management and pricing strategy. This paper aims to analyze the given cost structure and revenue parameters to identify the appropriate quantities of bags to order at a $15 per entry price, utilizing various economic principles and formulas to arrive at a viable solution.

In this scenario, the cost data provided include fixed costs, variable costs, and total costs at different levels of production, although the exact numerical relationships are somewhat obscured in the initial data. Nonetheless, a typical cost structure scenario involves fixed costs (which do not change with the level of production), variable costs (which vary directly with output), and consequently total costs (the sum of fixed and variable costs). To optimize profitability, firms analyze the relationship between marginal revenue (MR) and marginal cost (MC), as well as breakeven analysis based on fixed costs (F), average variable cost (AVC), and the price charged per entry.

The fixed costs in this case amount to $1,700, which remain constant regardless of the quantity ordered. The variable costs are not explicitly specified in the text, but we can infer that they increase with each additional batch of 100 bags. The price per entry is $15, which forms the basis for calculating marginal revenue. Assuming that revenue per unit remains constant at $15 (a typical assumption in perfect competition or price-taking scenarios), the marginal revenue (MR) associated with each additional bag is also $15.

To determine the breakeven point, the firm must cover both fixed and variable costs. The total fixed cost (F) is $1,700, and the average variable cost per batch depends on the variable cost structure. If we assume that the variable cost per batch is consistent or increases gradually, the point where total revenue equals total costs yields the breakeven quantity. Using the formula Qb = F / (P - AVC), where P is price per entry, provides an effective way to determine the breakeven quantity. Given that P is $15 and F is $1,700, the main variable is AVC, which we need to estimate based on cost data patterns.

Considering the two proposed quantities—300 bags and 200 bags— we analyze whether each approach aligns with profit maximization principles, specifically MR ≥ MC. At the breakeven point, marginal revenue equals marginal cost. With MR at $15, the key is to determine the corresponding MC at the given quantities. If MD ≥ MC at 200 bags, then 200 is an appropriate order size; similarly, if MC at 300 bags is less than or equal to $15, then ordering 300 bags might be advantageous.

Applying the formula Qb = F / (MR - AVC), and recognizing that MR is effectively $15 in this context, the calculation hinges on adjusting AVC estimates. If AVC is, for example, $10, then Qb becomes 1700 / (15 - 10) = 1700 / 5 = 340 bags. Since orders must be placed in blocks of 100 bags, the closest multiple (either 300 or 400) should be selected to meet the breakeven threshold. If AVC is higher, the breakeven quantity increases accordingly. Since the problem states an optimal quantity of 200 or 300 bags, these choices likely correspond to specific estimates of AVC derived from cost data.

It’s critical to assess the marginal costs at the provided quantities, and compare with the marginal revenue of $15. If MR ≥ MC at 200 bags, then that quantity is profitable or at least breakeven. The same applies at 300 bags. Without explicit MC or AVC values, we rely on the mathematical relationships and given options. Given the guidance that the optimal quantity could be 200 or 300, the most suitable approach would involve calculating the breakeven quantity based on fixed costs, price, and variable costs, then choosing the closest block of 100 that satisfies profit maximization criteria.

Therefore, the most appropriate approach is to use the formula Qb = F / (MR - AVC), considering the given cost structure, and compare the outcomes to the options of 200 or 300 bags for ordering. Ultimately, the decision hinges on whether MR ≥ MC at these quantities, ensuring that the chosen quantity maximizes profit or ensures breakeven performance.

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