Production Analysis
The N. E. Fishent Widget Corp. (NWC) has a monopoly in producing and selling widgets and faces the following demand relationship for its widgets (where Q is the quantity per year and P is the price in U.S.$):
Q = 10000 - 100P; equivalently, P = 100 - 0.01Q
The company has fixed costs of $140,000.00 and variable costs of $20.00 per widget.
(a) What is the profit maximizing level of production/sales for this company? What is the price? What are its profits?
(b) The senior management of NWC, concerned that profits may not be as high as they could be, hires a costing consultancy firm - Tech and Lux LLC (aka T&L) -- to assess T&L's costs. T&L discovers that the company has been misinterpreting its fixed and variable costs. Consequently, T&L concludes that NWC's true fixed costs are only $60,000, while its true variable costs are $40.00 per widget. On the assumption that T&L is correct, what would your answers to (a) be? Explain why the new answers are different (or why they are not).