Last year, a toy manufacturer introduced a new toy truck th
Last year, a toy manufacturer introduced a new toy truck that was a… Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $6.50 million in a plastic injection molding machine (which can be sold for $6 million immediately) and $300,000 in plastic injection molds specifically for the toy (not valuable to anyone else). The cost of labor and materials necessary to make each truck runs about $6. This year, a competitor has developed a similar toy, significantly reducing demand for the toy truck. Now, the original manufacturer is deciding whether it should continue production of the toy truck.If the estimated demand is 200,000 trucks, the break-even price is per truck 2. In early 2008, you purchased and remodeled a 120-room hotel to handle the increased number of conventions coming to town. By mid-2008, it became apparent that the recession would kill the demand for conventions. Now, you forecast that you will be able to sell only 20,000 room-nights, which cost $60 per room per night to service. You spent $30.00 million on the hotel in 2008, and your cost of capital is 10%. The current going price to sell the hotel is $25 million.If the estimated demand is 20,000 room-nights, the break-even price is per room, per night. (Hint: Remember that the cost of capital is the opportunity cost, or true cost, of making an investment.) 3. A firm sells 1,000 units per week. Suppose the average variable cost is $15, and the average cost is $55.In the short run, the break-even price is . In the long run, the break-even price is .Suppose the firm charges a price of $60 per unit.Use the following table to indicate whether the firm will shut down or continue to produce in the short run and the long run.TimeContinue to ProduceShut Down Short Run Long Run Business Economics ECN 601
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