A small firm intends to increase the capacity of a bottleneck operation by addin

Question

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 $17.

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 the nearest whole amount.) Profit units

c. If expected annual demand is 14,000 units, which alternative would yield the higher profit? Higher profit

Explanation / Answer

a)

Break even point for A=Fixed price/( Revenue-variable price)

=36000/10= 3600 units

Break even point for B=Fixed price/( Revenue-variable price)

=31000/6= 5167 units

b) Profit of A = Profit of B

(17-7)*a-36000= (17-11)a -31000

solving for a and it is 1250units

Notice that this is before either units break-even point so they will not be generating any profit at this point but rather they still owe the same amount or have the same net loss on each unit at this point.

At this units the loss is $23,500

c)Profit of A=(10*14000)-36000= $104,000

Profit for B=(6*14000)-31000= $67,000

A will yield higher profit.

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