The Diamond Jubilee is a floating riverboat casino that operates on the Mississippi River. The casino is open 24 hours daily and features slot machines, blackjack tables, poker tables, craps tables, and roulette tables. On average, for every $1.00 wagered at the Diamond Jubilee $0.82 goes back to the gamblers as winnings, and $0.08 covers the casino’s variable costs. The remaining $0.10 goes toward covering the casino’s fixed costs and contributing toward profit. The Diamond Jubilee’s fixed costs amount to $27,500 per month, and the casino pays combined state and federal taxes equal to 25% of profit before taxes.
For motivational purposes, the Diamond Jubilee links some of its general manager’s compensation to the casino’s profitability. Specifically, the riverboat’s general manager, Sapphire Sally, receives a monthly bonus equal to 5% of the casino’s profit before taxes and any bonus. The bonus is deductible for tax purposes. That is, taxes are paid on post-bonus profit.
How much do Diamond Jubilee patrons have to wager in a month for the casino to earn an after-tax and after-bonus profit of $28,500? (Hint: Begin by writing down the profit equation for pre-tax profit. Add in the bonus payment. Expand to consider taxes.)
Campus Bagels bakes and sells authentic New York-style kettle-boiled bagels. For the most recent year, Campus Bagels sold 160,000 bagels at a selling price of $1 per bagel. During this same year, Campus Bagels incurred fixed costs of $75,000 and variable costs of $0.25 per bagel.
Management of Campus Bagels is considering extending their product line to include bagel sandwiches. Management plans on selling each bagel sandwich for $4. At this price, they estimate selling four bagels for each bagel sandwich. Moreover, the variable cost per bagel sandwich would be $1.25 and the decision would increase Campus Bagels’ total fixed costs by $27,350 per year.
a. Assume Campus Bagels decides to introduce bagel sandwiches. At the expected sales mix, how many bagels and bagel sandwiches does Campus Bagels need to sell at the breakeven point?
b. Assume again that Campus Bagels plans to introduce bagel sandwiches and will sell four bagels for each bagel sandwich. Additionally, Campus Bagels desires to have the total breakeven volume (i.e., number of bagels + bagels sandwiches sold) equal 81,880. Further assume that Campus Bagels has yet to set a selling price for bagel sandwiches. What price would Campus Bagels need to charge for each bagel sandwich to make the breakeven volume equal 81,880 total items?
The Modern Packing Corporation (MPC) specializes in the manufacture of 1-liter plastic bottles. The plastic molding machines are capable of producing 100 bottles per hour. The firm estimates that the variable cost of producing a plastic bottle is 25 cents. The bottles are sold for 55 cents each.
Management has been approached by a local toy company that would like MPC to produce a molded plastic toy. The toy company wants 100,000 units of the toy, and is willing to pay $3.00 per unit. The unit variable cost to manufacture the toy will be $2.40. In addition, MPC would have to incur a cost of $20,000 to construct the mold required exclusively for this order. Because the toy uses more plastic and is of a more intricate shape than a bottle, a molding machine can produce only 40 units per hour.
MPC’s fixed costs, excluding the costs to construct the toy mold, during the same period will be $200,000. Assume that MPC has a total capacity of 10,000 machine hours available during the period in which the toy company wants delivery of the toys.
1. (2 points) Suppose the current demand for its bottles is 750,000 units. The customer indicates that this is an all-or-nothing order, meaning that MPC cannot fill part of the order. Should MPC accept the special toy order? Compute the incremental profit or loss from this decision.
2. (2 points) Suppose the current demand for its bottles is 850,000 units. The customer indicates that this is an all-or-nothing order, meaning that MPC cannot fill part of the order. Should MPC accept the special toy order? Compute the incremental profit or loss from this decision.
3. (3 points) Suppose the demand for its bottles is 900,000 units, and the toy company will accept any quantity of the special toy order. That is, the all-or-nothing aspect does not apply for this part. How many bottles and toys should MPC manufacture?
4. (3 points) MPC has located a firm that has just entered the molded plastic business. This firm has considerable excess capacity and more efficient molding machines, and is willing to subcontract the toy job, or any portion of it, for $2.80 per unit. It will construct its own toy mold. Suppose the demand for its bottles is 900,000 units, and the toy company will accept any quantity of the special toy order. How many bottles and toys should MPC manufacture? How many toys should it subcontract out?
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