Question

In you groups study the information given below. It is an extract from an email message from the CEO of a medium sized engineering company. Readthe information and then formulate a response from your group You need to answer John's question and also provide some form of explanation. Remember who you are dealing with; your response should communicate the ideas of your group clearly and professionally and the reasoning behind your answer should be thoroughly explained We estimate our total overhead cost to be approximately £6000 per calendar month. On top of that we have the cost of raw materials and other items which vary directly with output. We also have information regarding our level of revenue at a range of different outputs. We are currently producing 13 units per month and I would like you to look at our figures and assess whether we are producing at a level which would yield the highest possible level of Regards John Bull CEO; Bellmont Systems Output Ravw 1290 1315 1334 1347 1359 13 11193 11276 11351 11407 11453 11489 11525 11554 11570 11575 1391 1450 1498 1640

Answer 1

Output	Raw Materials	Overall Revenue	Marginal Cost	Marginal Revenue
11	1290	11000
12	1315	11102	1315 - 1290 = 25	11102 - 11000 = 102
13	1334	11193	1334 - 1315 = 19	11193 - 11102 = 91
14	1347	11276	1347 - 1334 = 13	11276 - 11193 = 83
15	1359	11351	1359 - 1347 = 12	11351 - 11276 = 75
16	1373	11407	1373 - 1359 = 14	11407 - 11351 = 56
17	1391	11453	1391 - 1373 = 18	11453 - 11407 = 46
18	1414	11489	1414 - 1391 = 23	11489 - 11453 = 36
19	1450	11525	1450 - 1414 = 36	11525 - 11489 = 36
20	1498	11554	1498 - 1450 = 48	11554 - 11525 = 29
21	1561	11570	1561 - 1498 = 63	11570 - 11554 = 16
22	1640	11575	1640 - 1561 = 79	11575 - 11570 = 5

Profit is maximum at an output level where Marginal Revenue = Marginal Cost

Thus, As per the table, MR = MC at an output level of 19 units.

Thus, in order to maximize its profit, the firm should produce 19 units of output. As the firm is producing 13 units of output, it is not the profit maximizing output.