Question

Metters Cabinets, Inc., needs to choose a production method for its new office shelf, the Maxistand. To help accomplish this, the firm has gathered the following production cost data: Variable Costs (per unit) ($) Labor Material Energy Process Type Mass Customization Intermittent Repetitive Continuous Annualized Fixed Cost of Plant & Equipment $1,200,000 $1,000,000 $1,720,000 $2,100,000 24 Metters Cabinets projects an annual demand of 60,000 units for the Maxistand. The selling price for the Maxistand is $120 per unit. a) Based on the projected annual demand, the best alternative available is to use the process. b) The value of annual profit using this method is $ (Enter your response as an integer.)

Answer 1

Volume of output (Q) = 60000 units

Per unit selling price(SP) = $120

For Mass customization

• Fixed cost (FC) = $1200000
• Total variable cost (VC) = Labor cost + material cost + energy cost = $30+$18+$12 = $60
• Profit = Q(SP-VC)-FC = 60000(120-60)-1200000 = (60000 × 60)-1200000 = 3600000-1200000 = $2400000

For intermittent

• Fixed cost (FC) = $1000000
• Total variable cost (VC) = Labor cost + material cost + energy cost = $24+$26+$20 = $70
• Profit = Q(SP-VC)-FC = 60000(120-70)-1000000 = (60000 × 50)-1000000 = 3000000-1000000 = $2000000

For Repetitive

• Fixed cost (FC) = $1720000
• Total variable cost (VC) = Labor cost + material cost + energy cost = $28+$15+$12 = $55
• Profit = Q(SP-VC)-FC = 60000(120-55)-1720000 = (60000 × 65)-1720000 = 3900000-1720000 = $2180000

For continuous

• Fixed cost (FC) = $2100000
• Total variable cost (VC) = Labor cost + material cost + energy cost = $25+$15+$10 = $50
• Profit = Q(SP-VC)-FC = 60000(120-50)-2100000 = (60000 × 70)-2100000 = 4200000-2100000 = $2100000

a) So the best alternative is to use mass customization as it has the highest profit among all the alternatives available.

b) The value of annual profit using this method is $2400000