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2. Marginal cost analysis for additional capacity utilisation

If the company wants to increase capacity utilisation, marginal revenue should be higher then the marginal cost. Given below is the marginal cost analysis for the additional production and sale:

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Units Per unit Total

in crore ($)( $ Crore )

Production at 75% capacity 325

Additional units produced 65

(325 – 260)

Variable cost per unit 4.93 320.25

Additional fixed cost 1.12 73

Marginal cost 6.05

Incremental cost for 393.25

(65 crore units)

Marginal revenue 8.8

Incremental revenue for 572

(65 crore units)

MR – MC 2.75

Incremental Profit 178.75

(2.44 x 65Cr ) or (572Cr – 413.25Cr)

Since the marginal revenue is higher than the marginal cost, additional capacity should be utilised. By this the company would be able to increase its profit by $ 178.75 crore.

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