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 & B, have been identified, and the associated costs and revenues have been estimated. Annual fixed costs would be $50,000 for A and $45,000 for B; variable costs per unit would be $20 for A and $25 for B; and revenue per unit would be $30. If expected annual demand is 20,000 units, which alternative would yield the higher profit? A. Alternative B because it yields $55,000 B. Alternative A because it yields $18,000 C. Alternative B because it yields $18,000 D. Alternative A because it yields $150,000

Explanation / Answer

for profit =sales -cost

hence expected annual profit for A =20000*30-(50000+20*20000)=150000

expected annual profit for B =20000*30-(45000+25*20000)=55000

therefore option  D. Alternative A because it yields $150,000

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