Question

Joe’s Machine Shop has identified the grinding station as its key bottleneck and has identified two options for expansion. The Grinder 1000 has fixed costs of $20,000 and $10 per unit variable costs. The Grinder 2000 has fixed costs of $40,000 and $8 per unit variable costs. Revenue per unit is projected to be $16.

a. Determine the break-even point for each alternative.

b. At what volume of output would the two alter- natives yield the same profit?

c. If demand is 13,000 units, which option yields a higher profit? How much?

Answer 1

Calculation of Breakeven point: Grinder 1000: Fixed cost+Variable cost - Revenue per units projected 20,000 10p-16p Here, p is the unit produced. p 20,000/6-3333.3 units Grinder 2000: t+Variable cost 40,000 8p- 16p - Revenue per units projected 40,000-Sp = 16p 40.0008-5000 units

b. Profit equation for Grinder 1000: 16p (20,000 10p) -бр-20,000 Profit equation for Grinder 2000 6p40,000+8p) 8p-40,000 For the equilibrium, profits from both the grinders must be equal. Therefore, op-20.000-8p-40.000 2p 20,000 p 10,000 Hence, for 10,000 units both grinders will the same profit ofS40,000.

C. If the demand is 13,000: Grinder 1000: бр-20.000 -6x13,000 20,000 -$58,000 Grinder 2000 = 8p-40,000 8x 13,000-40,000 = $64,000 NOTE: Pis 13,000. Therefore Grinder 2000 will yield more profits from Grinder 1000. Difference = 64,000-58.000 = $6,000 The difference amount is S6,000.