Zan Azlatt and Angela Zesiger have joined torces to start A8z Lettuce Products,

Question

Zan Azlatt and Angela Zesiger have joined torces to start A8z Lettuce Products, a processor of packaged shredded lettuce tor instrtutional use. Zan has years ot tood processing experience, and Angela has extensive commercial tood preparation experience. The process will consist of opening crates of lettuce and then sorting, washing, slicing. preserving, and finaly packaging the prepared lettuce Together, with help from vendors, they think they can adequately estimate demand, fixed costs, revenues, antd variable cost per bag of lettuce. They think a largely manual process will have monthly foxed costs ot $40,0DD and vanable costs ot $1.75 per bag. A more mechanzed process wll have tixed costs of S80,000 per month with variable costs ot $1.00 per bag. They expect to sell the shredded lettuce for $2 75 per bag a) The break even quanitifty in units for the manual processbags fraund your response to he nearest whale number b) The revenue for the manual process al the break-even quantity round your response to the nearest whoie namber). c) The break-even quantity in units for the mechanized process bags fround your response to he nearest wnoile nuimber). a) The revenue for the mechanized process at tne break-even quantity tround your response to the nearest wnole numben) c) For monthly sales of 60.000 bags, for the option with manual processing. A&Z; Lettuce Products wil ave a profit of round your response to the nearest whoie number and inolude a minus sign if the prott s negatrve T) For monthty sales of 60,ddd bags, for the optlon with mechanized processing, A&z; Lettuce Praducts will have a proft of Sround your response to the nearest wnole number and include a minus sign i the pror is negatrve g) The quantity at which Zan and Angela are going to be indifferent between the manual and mechanized piocess bags (round your response to the nearest wnole number) h) lf the demand exceeds the point of indierence, then Zan and Angela should preter the option wth Ir the demand stays below the point of indirerence, then zan and Angeia should preter the option with | processing processing

Explanation / Answer

I cannot read all. The variable cost, for example, is it 1.76 or 1.75? I take it 1.75

(a)

For the manual process

Selling Price = $2.75
Variable cost = $1.75

Contribution per unit = $2.75 - $1.75 = $1.0

Breakeven quantity = Fixed Cost / Contribution per unit = $40,000 / $1.0 = 40,000

(b)

Revenue at BE = 40,000 x $2.75 = $110,000

(c)

For the mechanized process

Selling Price = $2.75
Variable cost = $1.00

Contribution per unit = $2.75 - $1.00 = $1.75

Breakeven quantity = Fixed Cost / Contribution per unit = $80,000 / $1.75 = 45,714

(d)

Revenue at BE = 45,714 x $2.75 = $125,714

(e)

For manual process, profit at volume of 60,000 = ($2.75 - $1.75) x 60,000 - $40,000 = $20,000

(f)

For mechanized process, profit at volume of 60,000 = ($2.75 - $1.00) x 60,000 - $80,000 = $25,000

(g)

Indifference point being 'P'

($2.75 - $1.00) x P - $80,000 = ($2.75 - $1.75) x P - $40,000
or, 1.75P - 1.00P = 40,000
or, P = 40000/0.75 = 53,333

(h)

When demand > indifference point, prefer mechanized process. (clear form part (e) and (f) themselves)

(i)

When demand < indifference point, prefer manual process

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