Pastry Paradise is looking to expand. It decides to take over Sweet Tooth, a competitive firm. The two firms have similar technology but different costs. Pastry Paradise has $1500 fixed costs and $1 marginal cost per unit produced. Sweet Tooth has $500 fixed costs but $5 marginal cost per unit produced. If the company plans to produce 5000 units of output, is using the competitor’s technology a good idea? a. Yes b. No c. It does not matter, at 5000 units you are indifferent between the two technologies d. None of the above

The correct answer is B.

Explanation:

Giving the following information:

Pastry Paradise has $1500 fixed costs and $1 marginal cost per unit produced. Sweet Tooth has $500 fixed costs but $5 marginal cost per unit produced.

First, we need to determine the total cost formula:

Total cost= total fixed costs + total variable cost

Pastry:

TC= 1,500 + 1*x

x= number of units

Sweet:

TC= 500 + 5x

x= 5,000 units

Now, we can calculate the cost difference:

Pastry= 1,500 + 1*5,000= $6,500

Sweet= 500 + 5*5,000= $25,500

It is not a good idea, because of the unitary variable cost. In Sweet company, the cost is significantly higher.

3rd the reason why is because of management and leadership