Need help finding the range of output. A company that produces pleasure boats ha

Question

Need help finding the range of output.

A company that produces pleasure boats has decided to expand one of its lines. Current facilities are insufficient to handle the increased workload, so the company is considering three alternatives, A (new location), B (subcontract), and C (expand existing facilities). Alternative A would involve substantial fixed costs but relatively low variable costs: fixed costs would be $275,000 per year, and variable costs would be S520 per boat. Subcontracting would involve a cost per boat of $2,570, and expansion would require an annual fixed cost of $53,000 and a variable cost of $1,100 per boat. a. Find the range of output for each alternative that would yield the lowest total cost. (Leave no cells blank - be certain to enter"0" wherever required. Round your answers to the nearest whole number.) b. Which alternative would yield the lowest total cost for an expected annual volume of 200 boats? A B C

Explanation / Answer

Three alternatives are having varying Fixed costs and variable costs, therefore comparison between them is made by using the concept of Break Even Point (BEP) which is calculated by using the formula:

BEP = Difference between Fixed cost / Difference between variable cost

Firstly as B subcontracting has zero fixed cost so it is compared with the next higher fixed cost of option C and BEP suggests that upto 36 units B is preferred because the total cost is lower but more than 36 means go for C as its total cost is lower.

Similarly BEP between A and C implies that upto level of 382 option C is preferred over A and in case demand is 383 or more then A is the best option.

Therefore Range for A is 383 or more, for B between 0 to 36 and for C it is between 37 to 382 and hence for 200 units the best option is C with total cost of $273,000

x=200 Alternatives Fixed Cost Variable cost 379000 A 275000 520 514000 B 0 2570 273000 C 53000 1100

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