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The Advanced Engineering Economic Company ('AEE') is currently making its product (MEM502) in a process-focused shop,...

The Advanced Engineering Economic Company ('AEE') is currently making its product (MEM502) in a process-focused shop, where rental payments are $8000 per year and material costs are $40 per unit. Records show that AEE currently sells 200 units of the product MEM502 for $200 each. As the manager of AEE, you are considering a proposed repetitive focus in order to lowest costs, and hence, lower prices; thereby raising the demand. the proposed shop however, has rental payments of $24,000 per year and material costs of $10 per unit.

a) Formulate the total cost and profit function for AEE (show full solution)

b) if a price of $80 will allow 400 units to be sold, using the Analytical method, determine what profit(or loss) the proposed new process can generate. (show full solution)

C) determine the new break-even quantity and total cost using the graphical method.

d) as the manger of AEE, would you change the process? Explain why

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Answer #1
a) Cost Function:
Current Process
TC=40Q+8000
TC=Total Cost
Q=Quantity Produced
Sales Revenue =200Q
Profit (P)=200Q-40Q-8000
P =160Q-8000
NEW PROCESS:
TC=10Q+24000
P=200Q-10Q-24000=190Q-24000
b)
If Sales Price is $80
Profit Function:
P=80Q-10Q-24000=70Q-24000
Q=400
P=70*400-24000=$4,000
Profit =$4,000
C)Graphical Method Q P=70Q-24000
Quantity Profit
100 -$17,000
200 -$10,000
300 -$3,000
343 $10
400 $4,000
500 $11,000
D)Profit with existing Process for 200 units
P=160*200-8000= $24,000
Profit for new process with Q=200:
190*200-24000= $14,000
Profit for new process with Q=400 $4,000
Profit will decrease
Process should not be changed

X axis: Quantity, Y-Axis: Profit (Breakeven point=343) $15,000 $10,000 $5,000 50 100 300 400 500 600 -$5,000 -$10,000 -$15,00
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