A company that produces pleasure boats has decided to expand one of its lines. C
ID: 2421376 • Letter: A
Question
A company that produces pleasure boats has decided to expand one of its lines. Current facilities are insufficient to handle the increased workload, so the company is considering three alternatives, A (new location), B (subcontract), and C (expand existing facilities). Alternative A would involve substantial fixed costs but relatively low variable costs: fixed costs would be $285,000 per year, and variable costs would be $620 per boat. Subcontracting would involve a cost per boat of $2,580, and expansion would require an annual fixed cost of $60,000 and a variable cost of $1,100 per boat.
a. Find the range of output for each alternative that would yield the lowest total cost. (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to the nearest whole number.)
A _____ or more
B to _____
C to _____
b. Which alternative would yield the lowest total cost for an expected annual volume of 220 boats?
A
B
C
Explanation / Answer
Statement showing computations Particulars Alternative A Alternative B Alternative C Fixed Costs 285,000.00 - 60,000.00 Variable costs 620.00 2,580.00 1,100.00 Indifference point A and B Indiff pt = Diff in FC/ Diff in VC Indiff pt = 285,000/(2580-620) Indiff pt = 285,000/(1960) Indiff pt = 145.41 Indifference point A and C Indiff pt = Diff in FC/ Diff in VC Indiff pt = (285,000-60,000)/(1100-620) Indiff pt = 225,000/(480) Indiff pt = 468.75 Indifference point B and C Indiff pt = Diff in FC/ Diff in VC Indiff pt = 60,000/(2580-1100) Indiff pt = 60,000/(1480) Indiff pt = 40.54 Upto 40.54 Units = Alternative B From 40.54 to 468.75 = Alternative C From468.75 or more = Alternative A For 220 Boats Alternative C is best
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