Old Production Operation New Production Operation Unit Variable Cost Material $

ID: 2458036 • Letter: O

Question

Old Production Operation

New Production Operation

Unit Variable Cost

Material

$ .88

Labor

$1.22

$.22

Total per unit

$2.10

$1.10

Monthly Fixed Costs

Rent and depreciation

$450,000

$875,000

Supervisory labor

80,000

175,000

Other

50,000

90,000

Total per month

$580,000

$1,140,000

Expected volume is 600,000 units per month, with each unitselling for $3.10. Capacity is 800,000 units.

1. Compute the budgeted profit at the expected volume of 600,000units under both the old and the new production environments.

2. Compute the budgeted break-even point under both the old andthe new production environments.

3. Discuss the effect on profits if volume falls to 500,000units under both the old and the new production environments.

4. Discuss the effect has on profits if volume increases to700,000 units under both the old and the new productionenvironments.

5. Comment on the riskiness of the new operation versus the oldoperation.