value 0.62 points Problem 5-4 A small firm intends to increase the capacity of a
ID: 420845 • Letter: V
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value 0.62 points Problem 5-4 A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two alternatives, A and B, have been identified, and the associated costs and revenues have been estimated Annual fxed costs would be $36,000 for A and $35,000 for B, variable costs per unit would be $10 for A and $11 for B, and revenue per unit would be $19 a. Determine each alternative's break-even point in units (Round your answer to the nearest whole amount.) QBEPB b. At what volume of output would the two alternatives yiekld the same proft? (Round your answer to the nearest whole amount.) units c. If expected annual demand is 18,000 units, which alternative would yield the higher profit? (Click to select) References eBook & Resources Worksheet Difficulty 1 Easy F1 F2 F3Explanation / Answer
Table for evaluation of data provided
Let us assume that x units of the components are made. Break-even point is that point where the total costs are equal to the total revenue. It is a point of no profit and no loss.
Ans a)
Break-even point for Machine A
Total costs = Total revenue
36000 + 10 * x = 19 * x
36000 = 9 * x
x = 4000 units
Break-even point for Machine B
Total costs = Total revenue
35000 + 11 * x = 19 * x
35000 = 8 * x
x = 4375 units
Ans b)
Profit = Revenue - Costs
If the profits from Machine A are equal to the Profits from Machine B, then the difference between their respective revenues and costs would also be equal. Let us again assume that x units of components are sold
Profit for A = 19 * x - (36000 + 10 * x) = 9 * x - 36000
Profit for B = 19 * x - (35000 + 11 * x) = 8 * x - 35000
Equating them,
9 * x - 36000 = 8 * x - 35000
9x - 8x = 36000 - 35000
x = 1000
This means that only at 1000 units, the profits of these two machines would be equal. But at 1000 units, both these machines have not even reached the break-even point. At no other value of the number of units would the profits from Machine A be equal to Machine B.
Ans c)
If demand is 18000,
Profit for mahine A = 19 * x - (36000 + 10 * x)
= 9 * 18000 - 36000
= $126000
Profit for mahine B = 19 * x - (35000 + 11 * x)
= 8 * 18000 - 35000
= $109000
Hence machine A would be more profitable.
Machine A Machine B Fixed costs 36000 35000 Variable cost per unit 10 11 Revenue per unit 19 19Related Questions
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