Davy Metal Company Brass Case Study - Accounting Assignment Help

Assignment Task

Question 
Davy Metal Company produces brass fittings. Davy's engineers estimate the production function represented below as relevant for their long-run capitallabour decisions. Q = 500L0.6K0.8 where Q = annual output measured in kilograms, L = labour measured in person hours, K = capital measured in machine hours. Davy's employees are relatively highly skilled and earn £15 per hour. The firm estimates a rental charge of £50 per hour on capital. Davy forecasts annual costs of £500,000 per year.
a) Determine the firm's optimal capital-labour ratio, given the information above. Explain.
b) How much capital and labour should the firm employ, given the £500,000 budget?
c) Calculate the firm's output [4 marks]
d) Davy is currently negotiating with a newly organized union. The firm's personnel manager indicates that the wage may rise to £22.50 under the proposed union contract. Analyze the effect of the higher union wage on the optimal capital-labour ratio and the firm's employment of capital and labour. What will happen to the firm's output?

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