ENGINEERING ECONOMY ANALYSIS. Name Summer 2016 IE 360 Quiz-5 A factory producing

Question

ENGINEERING ECONOMY ANALYSIS.

Name Summer 2016 IE 360 Quiz-5 A factory producing electric power protectors operates at 65% of its capacity and produces 22,800 units per year. The unit manufacturing cost is computed as follows: Direct labor cost 21.25 Direct material cost $15.75 $11.00 Overhead The protectors are marketed through a factory distributor for $56.75 each. It is anticipated that the volume of production can be increased to 30,000 units per year if the price is lowered to $46.50 per unit. This action would not increase the present total overhead cost. Compute the present profit per year and the profit per year if the volume of production is increased

Explanation / Answer

Let's take the current situation first and compute the profits:

Production = 22800 units

Variable costs per unit = ( Direct Labour and material cost + Overhead cost) = ($21.25 + 15.75 + 11) = $48

There is no fixed cost element involved.

Price of product = $56.75 each

Thus Profit for present year = ($56.75 - $48) * 22,800 = $199,500

If volume of Production is increased,

Then no of units produced = 30,000

Per unit Variable costs remains the same = $48

But now the marketed price = $46.50

Thus Amount of Loss for current year = (1.50) * 30,000 = $45,000 (Loss)

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