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 $39,000 for A and $30,000 for B; variable costs per unit would be $10 for A and $11 for B; and revenue per unit would be $15. a. Determine each alternative's break-even point in units. (Round your answer to the nearest whole amount.) QBEPA QBEPB units 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 16,000 units, which alternative would yield the higher profit? Higher profit (Click to select)

Explanation / Answer

Breakeven Quantity for A = Fixed COst/ (Revenue - Variable Cost)

Breakeven Quantity for A = 39,000/ (15 - 10)

Breakeven Quantity for A = 7,800

Breakeven Quantity for B = Fixed COst/ (Revenue - Variable Cost)

Breakeven Quantity for B = 30,000/ (15 - 11)

Breakeven Quantity for B = 7,500

Part B:

Let quantity be Q

Q * (15 - 10) - 39,000 = Q * (15 - 11) - 30,000

Q = 9,000 units

Part C:

Profit for A = 16,000 * (15 - 10) - 39,000

Profit for A = 41,000

Profit for B = 16,000 * (15 - 11) - 30,000

Profit for B = 34,000

A will be preferred at 16,000 units

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