6. Breakdown of a cartel agreement Consider a town in which only two residents, Lorenzo and Neha, own wells that produce water safe for drinking. Lorenzo and Neha can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water.
Price
Quantity Demanded
Total Revenue
(Dollars per gallon)
(Gallons of water)
(Dollars)
3.60 0 0
3.30 35 116
3.00 70 210
2.70 105 284
2.40 140 336
2.10 175 368
1.80 210 378
1.50 245 368
1.20 280 336
0.90 315 284
0.60 350 210
0.30 385 116
0 420 0
Suppose Lorenzo and Neha form a cartel and behave as a monopolist. The profit-maximizing price is
$
per gallon, and the total output is
gallons. As part of their cartel agreement, Lorenzo and Neha agree to split production equally. Therefore, Lorenzo's profit is
$
, and Neha's profit is
$
.
Suppose that Lorenzo and Neha have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Lorenzo says to himself, "Neha and I aren't the best of friends anyway. If I increase my production to 35 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow."
After Lorenzo implements his new plan, the price of water to
$
per gallon. Given Neha and Lorenzo's production levels, Lorenzo's profit becomes
$
and Neha's profit becomes
$
.
Because Lorenzo has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Neha decides that she will also increase her production to 35 gallons more than the cartel amount.
After Neha increases her production, Lorenzo's profit becomes
$
, Neha's profit becomes
$
, and total profit (the sum of the profits of Lorenzo and Neha) is now
$
.
Note that Lorenzo and Neha started by behaving cooperatively. However, once Lorenzo decided to cheat, Neha decided to cheat as well. In other words, Neha's output decisions are based on Lorenzo's actions.
This behavior is an example of .

“wonderful! not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well,” said kim clark, president of martell company. “our $11,150 overall manufacturing cost variance is only 3% of the $1,536,000 standard cost of products made during the year. that’s well within the 3% parameter set by management for acceptable variances. it looks like everyone will be in line for a bonus this year.” the company produces and sells a single product. the standard cost card for the product follows: standard cost card—per unit direct materials, 4.00 feet at $4.00 per foot $ 16.00 direct labor, 1.1 direct labor-hours at $13 per direct labor-hour 14.30 variable overhead, 1.1 direct labor-hours at $2.40 per direct labor-hour 2.64 fixed overhead, 1.1 direct labor-hours at $6.50 per direct labor-hour 7.15 standard cost per unit $ 40.09the following additional information is available for the year just completed: a. the company manufactured 20,000 units of product during the year.b. a total of 77,000 feet of material was purchased during the year at a cost of $4.25 per foot. all of this material was used to manufacture the 20,000 units. there were no beginning or ending inventories for the year.c. the company worked 24,000 direct labor-hours during the year at a direct labor cost of $12.50 per hour.d. overhead is applied to products on the basis of standard direct labor-hours. data relating to manufacturing overhead costs follow: denominator activity level (direct labor-hours) 19,000 budgeted fixed overhead costs $ 123,500 actual variable overhead costs incurred $ 64,800 actual fixed overhead costs incurred $ 120,900required: 1. compute the materials price and quantity variances for the year. (round standard price and actual price to 2 decimal places. indicate the effect of each variance by selecting "f" for favorable, "u" for unfavorable, and "none" for no effect (i.e., zero 2. compute the labor rate and efficiency variances for the year. (round standard rate and actual rate to 2 decimal places. indicate the effect of each variance by selecting "f" for favorable, "u" for unfavorable, and "none" for no effect (i.e., zero 3. for manufacturing overhead compute: a. the variable overhead rate and efficiency variances for the year. (round standard rate and actual rate to 2 decimal places. indicate the effect of each variance by selecting "f" for favorable, "u" for unfavorable, and "none" for no effect (i.e., zero b. the fixed overhead budget and volume variances for the year. (indicate the effect of each variance by selecting "f" for favorable, "u" for unfavorable, and "none" for no effect (i.e., zero

M. cotteleer electronics supplies microcomputer circuitry to a company that incorporates microprocessors into refrigerators and other home appliances. one of the components has an annual demand of 235 units, and this is constant throughout the year. carrying cost is estimated to be $1.25 per unit per year, and the ordering (setup) cost is $21 per order. a) to minimize cost, how many units should be ordered each time an order is placed? b) how many orders per year are needed with the optimal policy? c) what is the average inventory if costs are minimized? d) suppose that the ordering cost is not $21, and cotteleer has been ordering 125 units each time an order is placed. for this order policy (of q = 125) to be optimal, determine what the ordering cost would have to be.

Turrubiates corporation makes a product that uses a material with the following standards standard quantity 8.0 liters per unit standard price $2.50 per liter standard cost $20.00 per unit the company budgeted for production of 3,800 units in april, but actual production was 3,900 units. the company used 32,000 liters of direct material to produce this output. the company purchased 20,100 liters of the direct material at $2.6 per liter. the direct materials purchases variance is computed when the materials are purchased. the materials quantity variance for april is: