Suppose Dell is currently selling 250,000 laptops per month. A mgr at Dell argues, "The last 10,000 laptops we producted increased our revenue by $8.5 million. However, because we are making a substantial total profit of $25 million from producting 250,000 laptops, I think we are producting the optimal number of laptops." Briefly explain whether you agree with this mgrs reasoning.
I failed to say that the last 10,000 laptops increased COSTS by 8.9 million
Do you agree with the manager's reasoning?
Yes
To determine whether the manager's reasoning is correct, we need to analyze the incremental revenue and profit generated by producing an additional 10,000 laptops.
First, let's calculate the revenue generated per laptop by dividing the incremental revenue ($8.5 million) by the additional number of laptops produced (10,000). This gives us $850 of revenue per laptop.
Next, let's analyze the profit per laptop. Since the total profit from producing 250,000 laptops is $25 million, we can calculate the profit per laptop by dividing the total profit by the total number of laptops. This gives us $100 of profit per laptop.
Comparing the revenue per laptop ($850) to the profit per laptop ($100), we can see that the incremental revenue generated by producing an additional 10,000 laptops is significantly higher than the profit generated per laptop. This suggests that producing more laptops would be beneficial in terms of revenue.
Therefore, the manager's reasoning is flawed. While the company is currently generating a substantial total profit by producing 250,000 laptops, it is clear that producing additional laptops would result in higher revenue generation. To optimize profits, the company should consider producing more laptops until the incremental revenue generated is equal to or close to the profit generated per laptop.