Preliminary plans are under way for the construction of a ne

Preliminary plans are under way for the construction of a new stadium for a major league baseball team. City officials have questioned the number and profitability of the luxury corporate boxes planned for the upper deck of the stadium. Corporations and selected individuals may buy the boxes for $100,000 each. The fixed construction cost for the upperdeck area is estimated to be $1,500,000, with a variable cost of $50,000 for each box constructed. 3.

What is the breakeven point for the number of luxury boxes in the new stadium?

b. Preliminary drawings for the stadium show that space is available for the construction of up to 50 luxury boxes. Promoters indicate that buyers are available and that all 50 could be sold if constructed. What is your recommendation concerning the construction of luxury boxes? What profit is anticipated?

Solution

total profit = 100000x – (1500000 + 50000x) = 50000x – 1500000

50000x – 1500000 = 0
50000x = 1500000
x = 30

b) The marginal revenue from a one-unit increases in sales is $100,000. The marginal cost (variable cost per box) is $50,000, which indicates a marginal profit of $50,000 for each additional box sold. Since marginal profit is positive, and all 50 boxes can be sold, it is recommended to build all 50 boxes. The total profit = 50000(50) – 1500000 = $1,000,000.

Hope this helps