X Electronics makes components for specialized computer work stations. It
operates out of a single manufacturing facility which it purchased for $2.5 million. If X runs one production shift per day it can produce up to 20,000 units a year. The company estimates that its labor and raw material costs are $18 per unit for this shift. By running a second shift, X can produce an additional 20,000 units but labor and raw material costs are $20 per unit for components produced on the second shift. X can also add a third shift to produce another 20,000 units (so 60,000 total). This shift is the least efficient so that labor and raw material costs rise to $22 for all units produced on the third shift. Overhead costs are $80,000 per year. X's investors think a 10% return on their investment is reasonable, based on alternatives available in the private equity market.
a. If the price X receives for its product is $30, how many must it produce and sell to breakeven (recover all its economic costs)?
b. Suppose X has increasing price competition. At what price level should Woodruff shut down production entirely in the short run?
c. The price of X's components has fallen to $21. How many units should X manufacture?
c. Some good news/bad news: the price X receives for its components has risen to $25. At the same time, however, X has become subject to regulations that require it to buy an environmental permit for every component it manufactures (to pay for disposal costs of the chemicals in the components). These permits are traded in an active market. At the current price of permits, X would need to spend $4 on permits for every component it produces. The government is considering giving (at no cost) X an annual allocation of permits sufficient to cover production at their full capacity. How much would the free allocation of permits affect X's (1) output and (2) profits (compared to what they would be if the company is required to purchase the permits in the market)?
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