Question

Tom Johnson Manufacturing intends to increase capacity through the addition of new equipment. Two vendors have presented proposals. The fixed costs for proposal A are​ $50,000, and for proposal​ B, $70,000. The variable cost for A is​ $12.00, and for​ B, $10.00. The revenue generated by each unit is​ $20.00.

​a) If the expected volume is​ 8,500 units, _______(proposal A or proposal B) with a total profit = $______ should be chosen ​(enter your response as a whole​ number).

Answer 1

For proposal A

Total Fixed cost = $50000

Total Variable cost =variable cost per unit X number of units produced = $12X8500 units = $102000

So,Total cost for proposal A = Total fixed cost + total variable cost = $50000 + $102000 = $152000

Total revenue for proposal A = Revenue per unit X number of units produced = $20 X 8500 units = $170000

Therefore,Total Profit for proposal A = Total revenue - Total cost = $170000 - $152000 = $18000

For proposal B

Total fixed cost = $70000

Total variable cost = Variable cost per unit X number of units produced = $10 X 8500 units = $85000

So,Total cost for proposal B = Total fixed cost + Total variable cost = $70000 + $85000 = $155000

Total revenue for proposal B = Revenue per unit X number of units produced = $20 X 8500 units = $170000

Therefore Total profit for proposal B = Total revenue - Total cost = $170000 - $155000 = $15000

Since the total profit for proposal A is higher than the total profit for proposal B,Proposal A should be choosen if the expected volume is 8500 units.

Therefore,the final answer is :

If the expected volume is 8500 units,proposal A with a Total profit = $18000 should be choosen.