CAT 2000 — DILR Question 34
Answer the following question based on the information given below.
ABC Ltd. produces widgets for which the demand is unlimited and they can sell all of their production. The graph below describes the monthly variable costs incurred by the company as a function of the quantity produced. In addition, operating the plant for one shift results in a fixed monthly cost of Rs. 800. Fixed monthly costs for second shift operation are estimated at Rs. 1200. Each shift operation provides capacity for producing 30 widgets per month.
Note : Average unit cost, AC = Total monthly costs/monthly production, and
Marginal cost, MC is the rate of change in total cost for unit change in quantity produced.
Assume that the unit price is Rs. 150 and profit is defined as the excess of sales revenue over total costs. What is the monthly production level of ABC Ltd. at which the profit is highest?
Answer & solution
30
- B
50
- C
60
- D
40
Profit = Sales Revenue – Total cost
Profit at 30 units = (150 × 30) – (800 + 2500)
= 4500 – 3300
= Rs. 1200
âµ Second shift charges will be incurred as the cost when the number of widgets are more than 30.
Profit at 40 units = (150 × 40) – (800 + 1200 + 3700)
= 6000 – 5700
= Rs. 300
Profit at 50 units = (150 × 50) – (800 + 1200 + 5000)
= 7500 – 7000
= Rs. 500
Profit at 60 units = (150 × 60) – (800 + 1200 + 6700)
= 9000 – 8700
= Rs. 300
∴ Profit at 30 units will be maximum.
Hence, option (a).