value: 4.00 points A small firm intends to increase the capacity of a bottleneck
ID: 435869 • Letter: V
Question
value: 4.00 points 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 fixed costs would be $39,000 for A and $30,000 for B; variable costs per unit would be $10 for A and $11 for B; and revenue per unit would be $15. a. Determine each alternative's break-even point in units. (Round your answer to the nearest whole amount.) QBEPA QBEPB units units b. At what volume of output would the two alternatives yield the same profit? (Round your answer to the nearest whole amount.) Profit units c. If expected annual demand is 16,000 units, which alternative would yield the higher profit? Higher profit (Click to select)Explanation / Answer
Breakeven point for alternative A = $39,000 / ( $15 - $10 ) = $7800
Breakeven point for alternative B = $30,000 / ($15 - $11) =$30,000/4 = $7,500
Total costs under both alternatives must be same to yield same profit.
Total cost = Fixed cost + Variable cost / unit x number of units
Let the required volume = N
Total cost under alternative A = $39,000 + $10.N
Total cost under alternative B = $ 30,000 + $11.N
Therefore ,
39,000 + 10.N = 30,000 + 11.N
Or, N = 9,000
REQUIRED VOLUME = 9,000 UNITS
Total cost under alternative A for 16,000 units = $39,000 + $10 x 16,000 = $39,000 + $160,000 = $199,000
Total cost under alternative B for 16,000 units = $30,000 + $11 x 16,000 = $30,000 + $176,000 = $206,000
Since total cost is less for alternative A , it will yield higher profit
HIGHER PROFIT = ALTERNATIVE A
REQUIRED VOLUME = 9,000 UNITS
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