Topnotch Protection Corporation
- Topnotch should not accept the offer because of production of an extra unit of 10000; the marginal revenue is less than the marginal cost. This means that the firm is increasing its profit through a production of one less unit. The ATC has decreased the MC for the additional units which are below the ATC
- If they accept the offer;
At 100,000 units
At 110000 units
MC= TC1– TC
MC= 2,090,000-2,000,000 = 90,000
TR= 25*100,000 = 2,500,000
TR1= 15*110,000 = 1,650,000
MR = TR1-TR
MR= 1,650,000-2,500,000 = -850,000
At 100,000 units
At 110,000 units
If Topnotch goes ahead and accept the offer they will operate at a loss of -440,000
- From the analysis the firm accountant and the production manager should have considered the long run production economies of scale and dis-economies of scale.
Production of extra units results in a decrease in the firm profit. The firm will not produce when the marginal revenue is negative, marginal cost, on the other hand, will intersect the average total cost curve at the minimum point.
- At the current firm production of 60% it cannot supply the new order of additional 10,000 units hence it needs to maximize the number of resources available to a full capacity. This will enable them to produce extra units at an increasing marginal revenue up to a profit-maximizing point.
- The firm needs to improve efficiency to produce more with the same level of factors of input. There’s need to improve labor productivity which is measured by individual output. The firm also needs to consider changes likely to occur in the amount of capital which also affects the labor force. There’s need to improve staff supervision to ensure that each maximizes their output. Improved firm efficiency will lead to low cost per unit of production, higher profits, higher wages, improved competition and economic growth.
- In the short run, the firm will make losses as a result of adding extra unit production. However, with improved efficiency and maximum utilization of all the available resources will enable the firm to make profits in the future. Also, it will also gain consumers loyalty which will enable it to increase sales in the market.