Drill Quest,Inc.manufactures drill bits for the oil industry.Drill Quest uses cost-plus pricing to set the price of its bits.Currently Drill Quest applies a 50 percent markup on average total cost.Average variable cost of producing bits is constant and equal to $6,000 per bit.Total fixed cost at Drill Quest is $550,000.DrillQuest currently produces 690 bits.Statistical estimation of demand for Drill Quest brand bits produces the following linear demand equation (where Q is the number of bits demanded and P is the price of bits): $Q = 1,200 - 0.05 P$ Using the cost-plus price,Drill Quest earns profit of (approximately)$___________ by selling 690 bits.

Question

Quizplus · Accepted Answer

To calculate the profit earned by selling the 690 bits using the cost-plus price, we need to first find the total cost per bit.

Total cost per bit = Total fixed cost / Number of bits produced + Average variable cost per bit

Total cost per bit = $550,000 / 690 + $6,000 = $15,797.10

Now, using the cost-plus pricing, the selling price per bit would be:

Selling price per bit = Total cost per bit * (1 + Markup percentage)

Selling price per bit = $15,797.10 * (1 + 0.5) = $23,695.65

Using the demand equation, we can find the quantity demanded at this price:

Q = 1,200 - 0.05P 
Q = 1,200 - 0.05($23,695.65) 
Q = 1,075.22

Since Drill Quest produces and sells only 690 bits, it faces a shortage of 385.22 bits.

The profit earned by Drill Quest can be calculated as:

Profit = Total revenue - Total cost 
Total revenue = Selling price per bit * Number of bits sold 
Total revenue = $23,695.65 * 690 = $16,335,000.50

Total cost = Total fixed cost + Total variable cost 
Total variable cost = Average variable cost per bit * Number of bits produced 
Total variable cost = $6,000 * 690 = $4,140,000

Total cost = $550,000 + $4,140,000 = $4,690,000

Profit = $16,335,000.50 - $4,690,000 = $11,645,000.50

Therefore, the profit earned by selling 690 bits using the cost-plus price is approximately $11,645,000, which is closest to option B ($2,345,000).

Drill Quest,Inc Q=1,200−0.05PQ = 1,200 - 0.05 PQ=1,200−0.05P Using the Cost-Plus Price,Drill Quest Earns Profit of (Approximately)$___________ by Cost-Plus

Drill Quest,Inc $Q = 1,200 - 0.05 P$ Using the Cost-Plus Price,Drill Quest Earns Profit of (Approximately)$___________ by Cost-Plus