A manager must decide how many machines of a certain type to purchase. Each mach

Question

A manager must decide how many machines of a certain type to purchase. Each machine can process 100 customers per day. One machine will result in a fixed cost of $2,000 per day, while two machines will result in a fixed cost of $4,000 per day. Variable costs will be $19 per customer, and revenue will be $45 per customer.

If estimated demand is 90 to 120 customers per day, how many machines should be purchased?

A manager must decide how many machines of a certain type to purchase. Each machine can process 100 customers per day. One machine will result in a fixed cost of $2,000 per day, while two machines will result in a fixed cost of $4,000 per day. Variable costs will be $19 per customer, and revenue will be $45 per customer.

Explanation / Answer

a. Revenue per machine = $45

Variable cost per machine = $19

Contribution = $45-$19 =$26

Range for one machine = 1 to 100

Range for two machine = 101 to 200

BEP :

One machine = $2000/ $26 = 77

Two Machine = $4000/$26 = 154

b. Since BEP for the 1st machine is 77and 77 is less than 90 and BEP for 2 machines is 154 which is less than 120 therefore one machine is to be purchased, as at the upper limit the break even level of 120 is not reached which is associated with the two machines.

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