Mop and Broom Manufacturing is evaluating whether to produce a new type of mop.
ID: 387491 • Letter: M
Question
Mop and Broom Manufacturing is evaluating whether to produce a new type of mop. The company is considering the operations requirements for the mop as well as the market potential Estimates of fixed costs per year are $40,000, and the variable cost for each mop produced is $20 (Source: #12, Page 93, Reid & Sanders, 6th edition) a) If the company sells the product at a price of $25, how many units of product have to be sold in order to break even? Use both the algebraic and graphical approaches. b) If the company sells 10,000 mops at the product price of $25, what will be the contribution to profit? Mop and Broom Manufacturing, from Problem 12, has decided to produce a new type of mop. The mop can be made with the current equipment in place. However, the company is considering the purchase of new equipment that would produce the mop more efficiently. The fixed cost would be raised to $50,000 per year, but the variable cost would be reduced to $15 per unit. The company still plans to sell the mops at $25 per unit. Should Mop and Broom produce the mop with the new or current equipment described in the previous problem? Specify the volume of demand for which you would choose each process. (Source: #13, Pages 93-94, Reid & Sanders, 6th edition) c)Explanation / Answer
= ( Price/unit – Variable cost /unit ) x Number of units sold – Fixed cost
= ( $25 - $20) x 10000 – 40,000
= $50,000 - $40,000
= $10,000
Contribution to profit = $10,000
Revised fixed cost = $50,000
Variable cost = $15/ unit
Sell price ( unchanged ) = $25/ unit
Therefore,
Revised profit earned by selling 10,000 mops
= ( ($25 - $15) x 10000 - $50,000
= $100,000 - $50,000
= $50,000
Since profit of $50,000 after buying new equipment > Profit of $10,000 with old equipment, mop and broom should produce the mop with new equipment
Let volume of demand at which one would choose new equipment = N
Th process with lesser cost will be chosen
Total cost under process run by new equipment for quantity N = 50,000 + 15.N
Total cost under process run by old equipment for quantity N = 40,000 + 20.N
Since ,
50,000 + 15.N < 40,000 + 20.N
Or, 5,N > 10,000
Or, N > 2000
Therefore , for volume of demand exceeding 2000 units, one would choose the new equipment. Otherwise one would go for old equipment.
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