Question #1 A production manager has obtained the following estimates of costs/r
ID: 2542017 • Letter: Q
Question
Question #1 A production manager has obtained the following estimates of costs/revenues for radios. Their plan is to produce this model of radio for 10 years. Yearly sales = 3,000 units/year (steady state/no growth expected) Sales Price = $80 unit Variable Cost-S38.50/unit Initial Investment = $ 1 25,000 (10) A. How many units does the company need to produce/sell to breakeven (4) B. Does the company break even during year 1? (6) C. How much PROFIT does the company make over the 10-year production run? Extra Credit (2) D. Suppose the company can reduce the Variable Costs by $8.00 per unit if they invested in the "Matest technology" for $200,000 (vice $125,000). Based upon the potential profitability over the 10 year period only, should the company invest in the latest technology?Explanation / Answer
Yearly Sales 3000 units Sales Price 80 per unit Variable cost 38.5 Initial Investment 125000 Time 10 years A Breakeven units=Initial Investment/(Selling Price-Variable Cost) 3012 (125000/(80-38.5)) B No since breakeven units are 3012 and year 1 sales were 3000. C Profit in 10 year production Run Units sold in 10 year 30000 (3000*10) Sales 2400000 (30000*80) Less: Variable Cost 1155000 (30000*38.5) Contribution Margin 1245000 Less: Initial Investment 125000 Profit 1120000 D Units sold in 10 year 30000 (3000*10) Sales 2400000 (30000*80) Less: Variable Cost 915000 (30000*(38.5-8)) Contribution Margin 1485000 Less: Initial Investment 200000 Profit 1285000 Yes Company should invest in the latest technology because by doing so company 10 year's profit increased from $1,120,000 to 1,285,000