Quikpak sells returnable containers to major food processors. The price received for the containers is £2 per unit. Of this amount £1.25 is profit contribution. Quikpak is considering an attempt to differentiate its product through quality improvement at a cost of 5p. per unit. Current profits are £40,000 on sales of 100,000 units.
a. Assuming that average variable costs are constant at all output levels, find Quikpak’s total cost function before the proposed change.
b. Calculate the total cost function if the quality improvement is implemented.
c. Calculate Quikpak’s break-even output before and after the change, assuming it cannot increase its price.
d. Calculate the increase in sales that would be necessary with the quality improvement to increase profits to £45,000.