Using the following information:
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 cost-plus pricing, Drill Quest prices its bits at $______________ per bit.
A) $10,195
B) $12,175
C) $797
D) $6,000
E) $6,797

Question

Using the following information:
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 cost-plus pricing, Drill Quest prices its bits at $______________ per bit.
A) $10,195
B) $12,175
C) $797
D) $6,000
E) $6,797

Quizplus · Accepted Answer

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. So, the average total cost is:ATC = AVC + AFC/Q= $6,000 + $550,000/690= $6,797Therefore, the price per bit using cost-plus pricing is:Price = ATC + Markup * ATC= $6,797 + 0.50 * $6,797= $10,195

Using the Following Information: Drill Quest, Inc Q=1,200−0.05PQ = 1,200 - 0.05 PQ=1,200−0.05P

Using the Following Information:
Drill Quest, Inc $Q = 1,200 - 0.05 P$