Costs and Revenue Simulation Curves

Costs and Revenue Simulation Curves

Anita Roseboro-Wade, Lashonicka Frye, Guillermo Lecca, JR Irwin, Carolyn Herbert

Eco-561

July 16, 2012

Frank Kingsland

Costs and Revenue Simulation Curves

Our team chose the state of California to set up our factory. The second half of the year of 2005 we produced 130,000 tons to maximize profits. The economic reasoning for these decisions were the difference between the total cost and total revenue was calculated to determine which production would enable the company's highest profit margin. However maximizing the profits per unit will not maximum profits overall. The cost of oranges has been reduced on 2005 the production level was increased in order to maximize profit to $ 1,388,000 in the second half of the month of July. We brought the production up to 130,000 tons from 120,000. The reasoning behind this was to have the Marginal Cost (MC) and our Marginal Revenue (MR) equal resulting in maximization in our total profit. Any attempt to have our MC greater than the MR would result in the drop of total revenue. The Average Variable Cost (AVC) would drop to from 21.12 to 19.32 if the unit would have the MC less than the MR.

Since the market is flooded with cheaper imports due to all of the heavy competition from South American manufacturers the market price of orange juice has taken a severe hit. These manufacturers get to take advantage of the lower costs because they are doing production outside of the United States. Unfortunately, this resulted in having to make serious decisions in order to be hit with the smallest losses in profits as possible. However, since the loss in profits was too severe to keep the production plant open and required a temporary shutdown for the first 6 months of 2008. The economic reasoning for the temporary shutdown of the production plant was that if we remained open the loss of profit would only escalate because of all of the expenses involved in the operation of the facility. Therefore to be able to remain in business and ensure future growth it was the best decision considering the economic conditions at that time.

During the second half of 2008 the state received a special tax cut which lowered manufacturing cost from 90.00 to 17.28, and helped us take production to 90,000 tons after the temporary shutdown during the first half of the year. Since the previous price was less than the average variable cost we were unable to recover part of our variable cost. So after the temporary shutdown taking production to 90,000 tons helped us move closer to break-even point. Here we are operating in the competitive market because we are able to recoup our losses