A small firm intends to increase the capacity of a bottleneck operation by addin

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 $36,000 for A and $31,000 for B; variable costs per unit would be $7 for A and $11 for B; and revenue per unit would be $17.

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 $36,000 for A and $31,000 for B; variable costs per unit would be $7 for A and $11 for B; and revenue per unit would be $17.

Explanation / Answer

a)

break even of A= 36000 + 7Q = 17Q, this implies Q= 3600

break even of B = 31000 + 11Q = 17Q, this implies Q = 5167

b) equating the profits of both the firms

17Q - (36000 + 7Q) = 17Q - (31000+ 11Q), this implies 4Q = 5000, Q=1250

c) profit from A = 17*14000 - (36000 + 7*14000) = 104000

profit from B = 17*14000 - (31000 + 11*14000) = 53000

A is more profitable

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