Economics Answers

Latin Corporation’s breakeven point in revenues is $1,000,000 and fixed costs is

$400,000

Required:

1) Compute the contribution margin ratio

2) Compute the selling price if variable costs are $12 per unit

3) Suppose 80,000 units are sold, compute the margin of safety

Using appropriate diagram(s), explain how a decrease in the price of the cars would

affect the demand of fuel.

Reno Company manufactures part No.498 for use in production line. The

manufacturing costs per unit for 20,000 units of part No.498 are as follows:

Direct materials $6

Direct Manufacturing Labor $30

Variable Manufacturing Overhead $12

Fixed Manufacturing Overhead Allocated $16

Total Manufacturing Costs Per Unit $64

Tray Company has offered to sell 20,000 units of part No.498 to Reno for $60 per unit. Reno

will make the decision to buy the part from Tray if there is an overall savings of at least $25,000

for Reno. If Reno accepts Tray’s offer, $9 per unit of fixed overhead allocated would be totally

eliminated. Furthermore, Reno has determined that the released facilities could be used to save

relevant costs in the manufacture of part No.575. For Reno to achieve an overall saving of

$25,000, how much is the amount of relevant cost that would have to be saved by using the

released facilities in the manufacture of part No.575

Sunshine Tours is a travel agency specializing in flights between Toronto and Jamaica.

It books passenger on Canadian air and charges passengers $1,000 per round-trip ticket.

Sunshine’s fixed costs are $22,000 per month. Its variable costs per ticket, including a delivery

fee is $18 (assume each ticket is purchased in a separate package. Thus the delivery fee applies

to each ticket)

Maryland International College Page 3

Required: -

1) What number of tickets Sunshine must sell each month to

a) Break even

b) Make a target operating income of $10,000

2) Assume another company, TNT Express, offers to charge Sunshine only $12 per ticket.

How would accepting this offer affect your answer to (a) and (b) in requirement 1?

The following data are obtained from the records of a factory

Sales (40,000 units @ Br. 25 each) ………… Br. 100,000

Less: Variable Costs………………………… 70,000

Contribution Margin ……………………….. 30,000

Less: Fixed Costs …………………………… 18,000

Net Profit …………………………………… 12.000

Required: Compute:

1) The number of units by selling which the company will neither loss or gain anything

2) The sales needed to earn a profit of 20% on sales

3) The extra units which should be sold to obtain the present profit if it is proposed to

reduce the selling price by 25%

4) The selling price to be fixed to bring down its break-even point to Br.500 units under

present condition

In Nyeri town there are only two milk processors. The local inverse demand for milk is given by: Q = 120− P, where P denotes price, Q denotes the total quantity measured in cartons. Both milk processors have the same cost function given by C = 30Q, where C is total cost and Q is output measured in cartons. What is the industry output (Q)?

The Kaldor-Hicks-Scitovsky test says that a re-allocation is desirable if two conditions are satisfied. State these conditions and explain each condition by giving examples?

Give an example of a principal-agent problem in Ethiopia and suggest a resolution? Design

an incentive contract to address the principal-agent problem you identified?

Sealed-bid auction and cournot game involves a new comer firm (2) and incumbent firm

operated for a year are can be an example of a game with incomplete information. Explain

using practical examples how each of these games can be games with incomplete

information?

Consider technology adoption decisions of two firms. Firm A has two possible types, either

high or low costs, with associated probabilities 2/3 and 1/3. Firm A observes its own type,

but firm B cannot observe it. Graphically, firm A knows which payoff matrix firms are

playing, while firm B can only assign a probability 2/3 or1/3 to playing the left-hand (right hand) matrix

a) Identify the strategy space of each firm?

b) Construct the Bayesian normal-form representation of the incomplete information game

and determine the Bayesian Nash equilibrium?