Capacity Decisions & Profit maximization.
Kate Smith, a chief executive officer (CEO) of a small pharmaceutical company that manufactures generic aspirin wanting the company to maximize its profits. She can sell as many aspirins as She make at the prevailing market price. She has only one manufacturing plant, which is the constraint. The plant works at full capacity 6 days a week, but she closes the plant on Sunday because on Sundays she would have to pay workers overtime rates and it is not worth it. The marginal costs are constant in the 6 days operations, only because labor costs are higher.
Now Kate obtain a long-term contract to manufacture a brand-name aspirin. The costs of making the generic aspirin or the brand-name aspirin are identical. In fact there is no cost or time involved in switching from the manufacture of on to the other. She will make much larger profits form the brand-name aspirin but the demand is limited. One day of manufacturing each week will permit you to fill the contract. She can manufacture both the brand-name and generic aspirin. Compared with the situation before you obtained the contract, your profits will be much higher if you begin to manufacture on Sundays (even if she has to pay overtime wages)
Generic aspirin. Each day she can make 1,000 cases of generic aspirin. she can sell as many as she make, for the market price of $10/case. Every week she has a fixed cost of $5,000 (land tax and insurance). No matter how many cased she manufacture, the cost of materials and supplies is $2 per case; the cost of labor is $5 per case, except on Sundays, when it is $10 per case.
Brand-name aspirin. she order for the brand-name aspirin requires that she manufactures 1,000 cases per week, which she sells for $30/case. The cost for the band-name aspirin is identical to the generic aspirin.
What do you think Kate should do?