Q.1(b) Due to new infrastructure projects and changes in city planning, A auto p

Question

Q.1(b) Due to new infrastructure projects and changes in city planning, A auto par manufacturing unit iw considering the relocation meaning it is moving to a different place. The owner estimates that he would incur a fixed cost of 6000s per week and the labour, energy and material costs to produce cake at that location will be 0.85.He estimates that the selling price of the auto part can be 1.8S. (12 marks- 3 marks for each sub question)

. 1-What number of auto parts must be sold in order to break even?

2-For this new location ,What profit or loss would there be on a sale of 22,000 parts per week

3-What number of parts will be required if the owner wants to realize a profit of 1000$ .

4-Suppose the manufacturer decides to buy a powerful motor of 500$ and a new lathe machine of 500$ which will increase the fixed cost by 1000$ more. As motor and new machine will be added to fixed cost. in this revised scenario what will be impact on break even point and now to earn a profit of 10,000$ how many pieces will be required to sell

Explanation / Answer

At breakeven point :

Total revenue = Total cost = Fixed cost + Variable cost/ unit x number of parts

If number of auto parts = N per week

Total revenue = 1.8/ unit x N units = 1.8N

Variable cost = 0.85/unit x N units = 0.85N

Fixed cost = 6000

Hence, Total cost = Fixed cost + Variable cost = 6000 + 0.85.N

Since,

Total revenue = Total cost

1.8.N = 6000 + 0.85.N

Or, 0.95N = 6000

Or, N = 6000/0.95 = 6315.78 ( 6316 rounded to nearest whole number )

NUMBER OF AUTO PARTS TO BE SOLD TO BREAKEVEN = 6316

Profit

= Total revenue – Total cost

= 1.8.N – 6000 – 0.85.N

= 0.95.N – 6000

For , N = 22,000

Profit = 0.95x 22000 – 6000 = 20900 – 6000 = 14900

PROFIT ON SALE OF 22,000 PARTS PER WEEK = 14900$

Let,

Number of parts for profit to be $1000 = N1

Therefore ,

1000 = 0.95.N1 – 6000

Or, 0.95.N1 = 7000

Or, N1 = 7000/0.95 = 7368.42 ( 7368 rounded to nearest whole number )

NUMBER OF PARTS REQUIRED TO RELAIZE A PROFIT OF 100$ WILL BE 7368

Let the revised breakeven point after purchase of new motor and lathe = N2

The revised fixed cost = $7000

Since,

Total revenue = Total cost

1.8.N2 = 7000 + 0.85.N2

Or, 0.95N = 7000

Or, N = 7368.42 ( 7368 rounded to nearest whole number )

Let number of pieces required to earn a profit of $10,000 = N3

Hence ,

10000 = 1.8.N3 – 7000 - 0.85.N3

Or,

10000 = 0.95.N3 – 7000

Or, 0.95N3 = 1700

Or, N3 = 17894.73 ( 17895 rounded to nearest whole number )

NEW BREAKEVEN POINT = 7368

NUMBER OF PIECES TO BE SOLD TO EARN $10,000 WILL BE 17895

NUMBER OF AUTO PARTS TO BE SOLD TO BREAKEVEN = 6316

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