Question

QUESTION 5 (20 points) A firm is considering two capacity alternatives: Alternative A and Alternative B. Alternative A would have an annual fixed cost of $40,000 and variable costs of $400 per unit. Alternative B would have annual fixed costs of $60,000 and variable costs of $200 per unit. Revenue per unit is expected to be $1000 per unit for Alternative A and $1050 for Alternative B. Complete the following parts using Excel. a) Create a graph for each alternative where you can observe the break-even point. Which alternative has a lower break-even point quantity? b) Find the point of indifference for these two alternatives. Create a graph that shows the point of indifference quantity. Explain where you would see the break-even point quantities in this graph along with the point of indifference. c) Provide a recommendation to the company. Which alternative should be selected and when?

Answer 1

a)

At break even point , Total profit = 0

Volume 1 20 3 25 4 50 5 60 6 66 7 67 870 9 100 10 120 11 140 12 160 13 180 14 Profit for Alternative A =1000* A2-40000-400*A2 =1000*A3-40000-400*A3 =1000* A4-40000-400* A4 =1000*A5-40000-400*A5 =1000*A6-40000-400*A6 =1000*A7-40000-400*A7 =1000*A8-40000-400*A8 =1000*A9-40000-400*A9 =1000*A10-40000-400*A10 =1000*A11-40000-400*A11 =1000*A12-40000-400*A12 =1000*A13-40000-400*A13

D E F G H L M N O 1 2 I J K Profit for Alternative A 0 25 80000 50 5 6 60000 Volume Profit for Alternative A -40000 -25000 -10000 60 -4000 66 -400 200 2000 100 20000 120 32000 140 44000 160 56000 180 68000 40000 8 70 9 20000 - 20 40 60 80 100 120 140 160 180 200 11 12 13 14 15 -20000 -40000 -60000

Break even point for alternative A = 67 units

Volume 1 20 3 25 4 50 5 60 7 67 8 70 9 71 10 100 11 120 12 130 13 150 Profit for Alternative B =1050*A2-60000-200*A2 =1050*A3-60000-200*A3 =1050*A4-60000-200* A4 =1050*A5-60000-200*A5 =1050*A6-60000-200* A6 =1050*A7-60000-200*A7 =1050*A8-60000-200*48 =1050*A9-60000-200*A9 =1050*A10-60000-200*A10 =1050*A11-60000-200*A11 =1050*A12-60000-200*A12 =1050*A13-60000-200*A13 14

D E F G H I J K L M N O 1 2 3 Profit for Alternative B 80000 60000 Volume Profit for Alternative B -60000 25 -38750 50 - 17500 -9000 -3900 -3050 -500 71 350 100 25000 120 42000 130 50500 150 67500 40000 70 20000 11 - 20 40 R 100 120 140 160 | -20000 12 13 14 - 40000 -60000 -80000

Break even point for Alternative B = 71 units

b)

Volume 1 20 3 25 4 50 7 67 870 971 10 100 Profit for Alternative A =1000*A2-40000-400*A2 =1000*A3-40000-400*A3 =1000*A4-40000-400*A4 =1000*A5-40000-400*A5 =1000*A6-40000-400*A6 =1000*A7-40000-400*A7 =1000*A8-40000-400*A8 =1000*A9-40000-400*A9 =1000*A10-40000-400*A10 =1000*A11-40000-400*A11 =1000*A12-40000-400*A12 =1000*A13-40000-400*A13 Profit for Alternative B =1050*A2-60000-200*A2 =1050*A3-60000-200*A3 =1050*A4-60000-200*A4 =1050*A5-60000-200*A5 =1050*A6-60000-200*A6 =1050*A7-60000-200*A7 =1050*A8-60000-200*A8 =1050*A9-60000-200*A9 =1050*A10-60000-200*A10 =1050*A11-60000-200*A11 =1050*A12-60000-200*A12 =1050*A13-60000-200*A13 11 120 12 130 13 150 16

A E F G H I J K L 1 2 - Profit for Alternative A - Profit for Alternative B 80000 60000 Volume Profit for Alternative A Profit for Alternative B 0 - 40000 -60000 25 -25000 -38750 -10000 -17500 -4000 -9000 -400 -3900 200 -3050 2000 -500 2600 350 5000 3750 80 8000 8000 130 38000 50500 150 50000 67500 40000 20000 0 20 40 80 100 120 140 160 -20000 - 40000 -60000 -80000

The point of indifference = 80 units

c)

When volume < = 80 units , select alternative A

When volume > = 80 units, select alternative B