The California Instruments Corporation
The California Instruments Corporation, a producer of
electronic equipment, makes pocket calculators in a plant that is run
autonomously. The plant has a capacity output of 200,000 calculators per year,
and the plant’s manager regards 75 percent of capacity as the normal or
standard output. The projected total variable costs for the normal or standard
level of output are $900,000, while the total overhead or fixed costs are
estimated to be 120 percents of total variable costs. The plant manager wants
to apply a 20 percent markup on cost.
a. What
price should the manager charge for the calculators?
b. If the
price set is the profit=maximizing price, what is the price elasticity of
demand for calculators faced by the plant?
c. If the
price elasticity of demand were 24, what would be the optimum markup on cost
that the manager should apply?
d. If during
the year the plant manager receives an order for an additional 20,000 of its
calculators from a school system to be delivered in four months for the price
of $10, should the manager accept the order?
e. If
California Instruments wants to add the pocket calculator to its own product
line, what should be the transfer price of the pocket calculators?
f. Suppose
that in the future the plant will sell pocket calculators to the marketing
division of California Instruments and on the external imperfectly competitive
market, where the price elasticity of demand is Ep = -2. What would be the net
marginal revenue of the marketing division of the firm for the pocket
calculators? At what price should the calculators be sold on the external
market?
