CORE OBJECTIVES FOR CRITICAL THINKING:
1. Analysis: Student identifies, interprets, and summarizes the issue or problem.
2. Inquiry: Student seeks information using data, ideas, or perspectives pertaining to an issue or problem.
3. Evaluation: Student uses relevant arguments to support a conclusion.
4. Synthesis: Student communicates a cohesive conclusion.
5. Creativity/Innovation: Student uses new ideas or approaches that are relevant to the task or problem.
INFORMATION:
Topnotch Protection Corporation is an American company that manufactures cost-effective protective covers for smartphones made out of innovative composite material, which currently are being sold only in the United States. Topnotch currently produces and sells 100,000 protective covers a month and operates its one factory at 60 percent capacity. At that output, the average total cost (ATC) of manufacturing a protective cover is $20.00. Experience has shown that the ATC decreases as output is expanded beyond 100,000 units per month but rises again if output is increased above 125,000 units per month.
Topnotch Protection Corporation normally sells its protective covers domestically for $25.00 each. It recently received an order for an additional 10,000 protective covers per month from a buyer in a foreign country where Topnotch would like to do business. This buyer specified that it would pay no more than $15.00 per protective cover. The firm's accountants estimate that at 110,000 units a month, the ATC of producing a protective cover would be $19.00. Topnotch executives want to accept the order.
INSTRUCTIONS:
1. Draw the firm's ATC curve and fit the MC curve to it. Then estimate MC at Q = 110,000. Use the profit-maximizing rules (assume P = MR for this paper) to answer the following questions:
a. Should Topnotch accept the offer?
b. If they accept the offer, will their profit rise or fall? By how much?
c. Are the accountants correct in their analysis? What would the production manager say?
d. Could the firm fill this order in their existing plant? Or, must expansion take place?
e. What changes in workforce, staffing, and procuring raw materials might be required to fulfill this order?
2. Whether this order is profitable or not, would it make sense to accept the order in order to expand into an international market?