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The Planter Company is the producer of the following agricultural equipment: tractors and seeders. To determine how much of the two products the company should produce, it is necessary to consider maximum profit. First, the company should consider per unit costs and revenues associated with the production and selling of each product.
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Based on accounting profit indicated below, the company should decide to produce only tractors. However, using resources to manufacture product X would mean giving up manufacture of product Y. This is called the “opportunity cost” of product X. The cost of producing one tractor ($ 2,000) equals twice the cost of producing a seeder ($ 1,000). This means that on top of explicit costs, the implicit cost of producing one tractor equals the potential profit that could be earned from producing two seeders.
In terms of total profits, there are further constraints that need to be considered. One of them is the total cost that the company can bear. For instance, the company can only spend $100,000. This means that the company can only produce 50 tractors and no seeders, or 100 seeders and no tractors, or 25 tractors and 50 seeders, and so on. Another major constraint is demand, which also affects the total revenue the company can earn. For instance, based on the projections there will be market demand for only 10 tractors. Given this and all factors considered above, the Planter Company can produce 10 tractors and 80 seeders for a total cost of $100,000 and total potential revenue of $200,000.
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