1. A coffee shop owner wants to make a decision on purchasing a new espresso mac
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Question
1. A coffee shop owner wants to make a decision on purchasing a new espresso machine and he is having three options for the espresso machine. The fixed costs and variable costs are given below. MachinesFixed cost Machine A S600 Machine B $1100 Machine C $1800 Machine D $2700 Variable cost $12 $8 $4 $1 a. Over what range of production is each machine most economical Which machine should the owner choose for production of 200 cups of coffee and why? What would be the profit for selling this quantity if the selling price is $15 per cup? b.Explanation / Answer
a.
To find the range of production for each machine to be most economical, we need to find the breakeven point for each.
This is the quantity when the total profit is zero.
BEP = Fixed Cost / (Selling price - Variable cost)
BEPA = 600 / 15-12 = 200 cups
BEPB = 1100 / 15-8 = 157.1 158 cups
BEPC = 1800 / 15-4 = 163.6 164 cups
BEPD = 2700 / 15-1 = 192.85 193 cups
b.
Now to decide which Machine to choose, we need to calculate the profit from selling 200 cups of coffee each.
Profit from Machine = (200 - BEP) * (Selling price - Variable cost)
PA = (200 - BEPA) * (15 - 12) = (200 - 200) * (15 - 12) = $0
PB = (200 - BEPB) * (15 - 8) = (200 - 158) * (15 - 8) = 42 * 7 = $294
PC = (200 - BEPC) * (15 - 4) = (200 - 164) * (15 - 4) = 36 * 11 = $396
PD = (200 - BEPD) * (15 - 1) = (200 - 193) * (15 - 1) = 7 * 14 = $98
Hence, the correct choice is Machine C.
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