Question

8. A privately owned company manufactures metal seat frames that are used to make automobile seats. Its customer, the seat manufacturer, forecast that 50,000 frames will be needed next year. The seat frame manufacturer must determine which process to install. One process is more labor-intensive with fixed costs of $400,000 and variable costs of $90 per frame. The second process has fixed costs of $850,000 and variable costs of $75 per frame. Which process do you recommend? Why? 9. An insurance company is evaluating a new software system designed to reduce the time for claims processing. The fixed costs with the new system are S120,000 per year. The average variable costs with the new system are $20 per claim. The current system being used by the company has fixed costs of $80,000 and variable costs of $35 per claim. What is the indifference point between these two processes? If the company expects to process 3,500 claims per year, which process would you recom mend? Why? 10. Party Pools LLC assembles pool pumps for residential in-ground swimming pools. Fixed costs to produce model P07 pump are $75,000 per year. Variable costs per pump for this model are $40. The company is evaluating a new process that would increase fixed costs to S150,000 per year but will reduce variable costs to $15/pump. What sales volume is needed to justify this investment? 11. The Jazzy Java Company is considering upgrading its espresso machine to reduce the time to make each cup of coffee. The current machine has fixed costs of $3,000 per year and variable costs of $.75 per cup of coffee. With the new machine, fixed costs increase to $7,000 per year and variable costs are $.40 per cup of coffee a. What is the indifference point between the two processes? b. If the forecast is for 12,500 cups of coffee to be sold each year, which process should be used? Why? 12. The process used by the Gourmet Food Company to produce dressings has annual fixed costs of $240,000 and variable costs of $0.50 per bottle. The company just entered into an agreement with a major national grocery store chain to sell its dressings. Sales volumes are expected to increase. Two new processes are being explored. The first has a fixed cost of $320,000 per year and variable costs of $.30 per bottle. The second has fixed costs of $400,000 per year and variable costs of $.25 per bottle. a. What are the indifference points between the processes? b. If sales are expected to be 1,000,000 bottles, which process should be used?

Answer 1

8) Number of frames forecasted = 50,000

Total cost = Fixed Cost + Variable cost * Number of units

For process 1:

Total cost(in $) = 400000 + 90 * 50000 = $4,900,000

For process 2:

Total cost(in $) = 850000 + 75 * 50000 = $4,600,000

Clearly total cost of process 2 < total cost of process 1,

hence process 2 is recommended

9)

Let x be the indifference point.

Total cost = Fixed Cost + Variable cost * Number of cases

For current system

Total cost(in $) = 80000 + 35 * x

For updraded system

Total cost(in $) = 120000 + 20 * x

at indifference point:

Total cost(in $) for current system = Total cost(in $) upgraded system

80000 + 35 * x = 120000 + 20 * x

Solving for x we have the indifference point as:

x = 2666.67

Number of cases forecasted = 3500

Total cost = Fixed Cost + Variable cost * Number of cases

For current system

Total cost(in $) = 80000 + 35 * 3500 = 202,500

For updraded system

Total cost(in $) = 120000 + 20 * 3500 = 190,000

Clearly total cost of upgraded system < total cost of current system,

hence process 2 is recommended

10)

Let x be the indifference point.

Total cost = Fixed Cost + Variable cost * Number of pumps

For current system

Total cost(in $) = 75000 + 40 * x

For updraded system

Total cost(in $) = 150000 + 15 * x

at indifference point:

Total cost(in $) for current system = Total cost(in $) upgraded system

75000 + 40 * x = 150000 + 15 * x

Solving for x we have the indifference point as:

x = 30000

Hence a sales volume of 3000 and above is needed to justify the investment.

11)

Let x be the indifference point.

Total cost = Fixed Cost + Variable cost * Number of cups

For current system

Total cost(in $) = 3000 + 0.75 * x

For updraded system

Total cost(in $) = 7000 + 0.40 * x

at indifference point:

Total cost(in $) for current system = Total cost(in $) upgraded system

3000 + 0.75 * x = 7000 + 0.40 * x

Solving for x we have the indifference point as:

x = 16000

Number of cups forecasted = 12500

Since the indifference point is more than 12500, we can say that the current system is feasible. If the number of cups exceeds the indifference point the upgraded system would have been recommended. The total cost obtained of the current system for 12500 cups demand is less than that of the upgraded system.