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 $2,100 per day, while two machines will result in a fixed cost of $3,900 per day. Variable costs will be $17 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 $2,100 per day, while two machines will result in a fixed cost of $3,900 per day. Variable costs will be $17 per customer, and revenue will be $45 per customer.

Explanation / Answer

a. Break even point (BEP) = fixed cost/(Revenue per customer - variable cost per customer)

Thus, for one machine,

BEP = 2100 / (45 - 17) = 2100/28 = 75 customers

For two machines,

BEP = 3900/(45 - 17) = 3900/28 = 139.2857 ~ 140 customers

b. If customer range is from 90-120, one machine should be purchased as the minimum number of customers required to purchase two machines is 140.

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