Doorway Computers Manufactures PCs, and Also Produces the Special DVD

question 45

Essay

Doorway Computers manufactures PCs, and also produces the special DVD drives that go into each PC. Demand for computers is estimated to be: P = 2,000 - .1Q, where Q denotes units sold per month, and P is the price of the PC. The firm's total cost is C = 40,000 + 800Q + C_D, where C_D denotes the firm's total cost of producing drives. Currently, C_D = 100Q_D, that is, the firm's cost per drive is $100.
(a) If there is no external market for DVD drives, how many computers should Doorway produce and sell in order to maximize profit? What transfer price should the firm set for disk drives?
(b) The manager of the disk drive division informs Doorway’s CEO that she has received offers to sell the specialty drives to outside customers for $200 each. In fact, the division has firm offers to sell up to 8,000 disk drives, which is the firm’s current maximum production capacity. If so, what is the optimal transfer price? How would your answer change if Doorway’s cost for producing drives is: C_D = 80Q_D + .02Q_D²? Assume that Doorway can buy or sell drives at the $200 market price.

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Definitions:

API Gravity Degrees

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T-Table Values

Values found in a table that correspond to the T-Distribution, used for hypothesis testing in statistics, especially when the sample size is small and the population standard deviation is unknown.

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The probability that a confidence interval will capture the population parameter in repeated samples.

Simple Linear Regression

A mathematical technique that represents the association between a single independent variable and a dependent variable through a linear formula.