Suppose the farm equipment manufacturer from the previous question was able to charge $30,000 per tractor, and produces and sells 2,000 tractors per year at that price. As a reminder, the company originally spent $3 million in research and development costs. The company now spends $20 million at the beginning of each year to rent a factory, and $10,000 per tractor in materials and wages. If another manufacturer enters the market in the middle of a year and engages the company in a price war, what is the lowest price the company would be willing to charge for each tractor?


Answer 1

Given Information:

Rent = $20,000,000

Materials and Wages = $10,000/tractor

Number of tractors = 2,000

Amount spent on R&D = $3 million

Required Information:

Lowest price to sell atractor= ?


Lowest price to sell atractor= at least $20,000

Calculations & Explanation:

The company needs to sell at least at a price that all of its manufacturing cost can be recovered without the profit margin.

This happens at a break-even point where total revenue equals the total manufacturing cost.

Total manufacturing cost = Total revenue

The revenue is number of tractors multiplied by some price x

Total revenue = 2,000*x

Total manufacturing cost = fixed cost + Variable cost

Total manufacturing cost = 20,000,000 + 2,000(10,000)

Total manufacturing cost = 20,000,000 + 20,000,000

Total manufacturing cost = 40,000,000


Total manufacturing cost = Total revenue

40,000,000 = 2,000*x

x = 40,000,000/2,000

x = $20,000

Therefore, the lowest price to sell each tractor should be atleast $20,000

Note: The R&D cost is not usually included in such scenarios because R&D cost is sunk and should not be added in these calculations.

Related Questions

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Based on the given description, Tina’s services fall into the category of possession processing services.

Possession processing service is defined as providing a service to goods or other physical possessions that the customer owns.

Thus, because Tina provides a service to people’s garden, her service falls into this category. Other examples for possession processing service include shoe cleaning service, plumbing, and housekeeping.

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When elasticity is positive the good is a normal good and increase in income will result in increase in amount demanded of the good.

In the scenario give a positive elasticity of 0.45 should result in higher consumption among higher income people than lower income people.

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Data provided as per the question below

Cost of goods sold = $982,000

Inventory = $186,000

Purchase = $945,000

The computation of amount of ending inventory is shown below:-

Cost of goods sold = Inventory + Purchase - Ending inventory

= $982,000 = $186,000 + $945,000 - Ending inventory

= $982,000 = $1,131,000 - Ending inventory

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Total= 36,800 pounds


Giving the following information:

Sales (units ) - Production (units):

May: 20,000 - 19,000

June: 18,000 - 16,000

Two pounds of material is required for each finished unit. The inventory of materials at the end of each month should equal 20% of the following month's production needs.

Purchases for May= production for the month + desired ending inventory - beginning inventory

Production= 19,000*2 pounds= 38,000 pounds

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Beginning inventory= (38,000*0.2)= (7,600)

Total= 36,800 pounds

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