Bonco, Incorporated: A Firm in Transition
Bonco, Incorporated, produces a patented surgical device known as the incis-a-matic. The device has been sold successfully in the U.S. market, but it has been produced in two of the company’s outdated plants, in Columbus, Ohio, and in Cincinnati, Ohio.
Barry Cosgrove, a young economist, hire to assist management in making decisions regarding the future of the incis-a-matic production and marketing strategies, has been developing cost and revenue data relevant to next year’s operations.
His boss, Mary Thompson, has argued that for the next year, the company should plan to duplicate this year’s annual output of 2,400 units and raise price from $10,000 to $12,000 per unit. Thompson’s reasoning is that the company plans to build a new plant that will begin operating year after next and has arranged to dispose of its two old plants. She believes they should imply mark time as far as output is concerned (in the old facilities), but raise price to cover some anticipated overall inflation in the economy.
Cosgrove’s data for the two plants are as follows:
Columbus Plant Cincinnati Plant
Output per Output per
Month Arc MC Month Arc MC
0 0
100 4,000 100 3,000
200 7,000 200 5,000
300 9,000 300 7,200
400 1,000 400 9,200
500 13,000 500 11,000
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From the company’s chief accountant, Cosgrove has learned that the total fixed costs per month will be $700,000 in the Columbus plant and $600,000 in the Cincinnati plant. He has discovered that no one in the company has ever attempted to estimate the demand curve for the incis-a-matic and that Thompson has always based her pricing and output recommendations on her general impressions about the state of the economy. In order to estimate the demand for the incis-a-matic, Cosgrove performed a survey of hospital administrators and department chiefs. The result was the following demand schedule:
Questions to do:
Given Cosgrove’s demand data, answer the following questions.
Question 1. What should Cosgrove recommend regarding next year’s total output and price per unit of the incis-a-matic?
Question 2. How should next year’s total output be allocated between the two plants? Why?
Question 3. What will be next year’s profit from sales of the incis-a-matic if Cosgrove’s data are accurate and his recommendations are followed?
Question 4. How does the Cosgrove recommendation compare with Thompson’s strategy in terms of profit?
Beginning year after next, Bonco, will be operating in its new plant, where a constant marginal cost of $5,000 per unit can be achieved over the 200- to 1,200-unit-per-month output range. Cosgrove has been asked to study the prospects for both U.S. and foreign sales of the incis-a-matic once the new plant is operational. For two years from now, based on analysis of surgical data from foreign hospitals and projections of U.S. demand, Cosgrove has estimated the following demand curves:
Arf = 20,000-15Qf
Arus = 21,000-20Qus
Where
Arf = average revenue from foreign sales,
Qf = quantity sold per month in the foreign market,
Arus = average revenue from sales in the U.S. market, and
Qus = quantity sold per month in the U.S. market.
In addition to preliminary data ion the new plant indicate that in the first year of operation, total fixed costs will be $800,000 per month.
Given the data on costs and on U.S. and foreign demand, answer the following questions for the first year of operations in the new plant.
Question 5. What price should be charged in the U.S. market? Why?
Question 6. What price should be charged in the foreign market? Why?
Question 7. What will be the amount sold in each market if the preceding prices are charged? Why?
Question 8. What will be the maximum profit obtained from incis-a-matic sales for the year? Why?