Problem 5-4
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A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two alternatives, A and B, have been identified, and the associated costs and revenues have been estimated. Annual fixed costs would be $36,000 for A and $31,000 for B; variable costs per unit would be $7 for A and $11 for B; and revenue per unit would be $18. |
| a. | Determine each alternative’s break-even point in units. (Round your answer to the nearest whole amount.) |
| QBEP,A | units |
| QBEP,B | units |
| b. | At what volume of output would the two alternatives yield the same profit? (Round your answer to thenearest whole amount.) |
| Profit | units |
| c. | If expected annual demand is 15,000 units, which alternative would yield the higher profit? |
| Higher profit | (Click to select)BA |
Solution :
A :
At break even point, Profit = 0, so, Revenue = Cost
Calculation for A :
FC + VC = Revenue
36000 + 7 * Q = 18 * Q
11 * Q = 36000
Q = 3272.73 = 3273 nos
Calculation for B :
FC + VC = Revenue
31000 + 11 * Q = 18 * Q
7 * Q = 36000
Q = 4428.57 = 4429 nos
B :
Profits for A = Profit for B
RevenueA - FCa - VCa = RevenueB - FCb - VCb
18 * Q - 36000 - 7 * Q = 18 * Q - 31000 - 11 * Q
4 * Q = 5000
Q = 1250nos
Profit = 18 * 1250 - 36000 - 7 * 1250 = -22250
C :
For demand of 15,000, A is better.
Problem 5-4 A small firm intends to increase the capacity of a bottleneck operation by adding...