Reference no: EM132898724
Digital Convert (DC) is a three-year-old startup company with most of its capital coming from banks and personal investments by the founders. DC manufactures a high-resolution scanner (MXP35). At the heart of the MXP35 is a photoelectric light sensor that converts light into digital pixels. DC currently produces the MXP35 for $480 (variable cost) per unit and incurs virtually no fixed manufacturing costs. All of its equipment is leased, and the leases are structured whereby DC only pays for the actual units produced. DC operates out of a building that is provided free by New York State for entrepreneurial startups. New York State also pays utilities, taxes, insurance, and administrative costs. DC does have fixed financing costs to service its existing loans, and these financing costs consume most of its profits from sales of the MXP35.
DC faces the following monthly demand schedule for the MXP35 (where price is the wholesale price DC receives):
Quantity Price
19 = $1,278
20 = $1,240
21 = $1,202
22 = $1,164
23 = $1,126
24 = $1,088
25 = $1,050
26 = $1,012
The equation of the demand curve for the preceding table is P = $2,000 - 38Q. In other words, if DC wants to sell 20 MXP35s per month, it would charge a wholesale price of $1,240 per unit.
Problem 1: DC learns of a new manufacturing process for their photoelectric light sensor that lowers the variable cost from $480 per unit to $100 per unit. But the equipment must be leased for $7,000 per month for 24 months. If DC leases the new equipment, then over the next 24 months DC commits to paying $7,000 each month. If DC installs the new equipment, what is the price-quantity combination that maximizes profits?
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