ECO204_2008_Test_2_solutions

a 10 points suppose prestige data services raises

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Unformatted text preview: , calculate the increase in commercial hours needed to make Prestige Data Services profitable. Show all calculations. Answer: From the case solution below, the AVC is constant and equal to $28. Suppose the new commercial hours are X. The change in the contribution from advertising is: = (800 28)X (800 28)138 7720 = (800 28)(X 138) 7720 To bring the company into profitability, the increased contribution must be greater than the current net loss of $21,438 in March 2003. Thus, the new number of commercial hours needed is: = (800 28)(X 138) 7720 > 21,438 = (800 28)(X 138) > 21,438 + 7,720 = (X 138) > {21,438 + 7,720}/(800 28) = X > {21,438 + 7,720}/(800 28) + 138 X 176 hours. If an advertising campaign budgeted at $7,7200 raising commercial hours to 176 hours, it will make the company profitable. The End 17 ECO 204, 2008-2009, Test 2 Solutions This test is copyright material and may not be used for commercial purposes without prior permission Exhibit 1 Prestige Data Services Summary of Computer Utilization, First Quarter 2003 Revenue Hours Intercompany Commercial Total revenue hours Service hours Available hours Total hours January 206 123 329 32 199 560 February 181 135 316 32 164 512 Marc...
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