Herb Phillipson\'s wants to enter the market quickly this year with a focus on k

Question

Herb Phillipson's wants to enter the market quickly this year with a focus on kayaks. Competition is heating up as the weather gets warmer and they have three options: 1) Refurbish old kayaks at a cost of $800 2) Make major modifications to existing stock at a cost of $1,100, or 3) Purchase new kayaks at a net cost of $1,800. If "Herb" chooses to refurbish the equipment, materials and labor will be $1.10 per kayak. If he chooses to make modifications, materials and labor will be $0.70 per kayak. If he buys new equipment, variable costs are estimated to be $0.40 per kayak. Which alternative (Plan A, B, or C) should "Herb choose if he thinks he can sell more than 3,000 kayaks? Path: p Words:0

Explanation / Answer

Breakeven between refurbish and major modifications = (FC major modification – FC refurbish) / (VC refurbish - VC major modification)

= (1100 – 800)/ (1.1 -.7)

= 400/.4 = 1000 units

Breakeven between new kayaks and major modification = (1800 – 1100)/ (.70 - .40) = 2333 units

Hence above 3000 units he should prefer Purchase new kayaks. Plan C should be preferred.

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