A small firm intends to increase the capacity of a bottleneck operation by addin
ID: 448891 • Letter: A
Question
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 $37,000 for A and $35,000 for B; variable costs per unit would be $8 for A and $11 for B; and revenue per unit would be $16.
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 $37,000 for A and $35,000 for B; variable costs per unit would be $8 for A and $11 for B; and revenue per unit would be $16.
Explanation / Answer
Given
Alternate A Alternate B
FC = $37,000 FC=$35,000
v=$18 v=$11
R=$16 R=$16
At what volume of output would the two alternatives yield the same profit?
Profit = Q ( R - v) - FC
Profit A = Profit B
Q ( R - v) - FC = Q ( R - v) - FC
Q(16-8) - 37,000 = Q(16-11) - 35,000
8Q -37,000= 5Q -35000
3Q = 2,000
Q= 666.66
= 667 (approx)
At 667 units the volume of output would be the two alternative yeild the same profit
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