A small firm intends to increase the capacity of a bottleneck operation by addin
ID: 2717707 • 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 $31,000 for B; variable costs per unit would be $9 for A and $11 for B; and revenue per unit would be $19.
.Determine each alternative’s break-even point in units
At what volume of output would the two alternatives yield the same profit?
If expected annual demand is 15,000 units, which alternative would yield the higher profit?
a..Determine each alternative’s break-even point in units
b.At what volume of output would the two alternatives yield the same profit?
If expected annual demand is 15,000 units, which alternative would yield the higher profit?
Explanation / Answer
a. Break even point is defined as the point where sales = costs (Please note all values in $) Alternative A Alternative B No. of units X Y Revenue/unit 19 19 Variable Costs/unit 9 11 Fixed Costs 37000 31000 Breakeven point 19X = 9X + 37000 19Y = 11Y + 31000 10X = 37000 8Y = 31000 X = 3700 units Y = 3675 units b. Let us assume the volume for both alternatives to be X Profit earned by Alternative A = 19X - 9X - 37000 Profit earned by Alternative B = 19X - 11X - 31000 Since both the profits should be equal 10X - 37000 = 8X - 31000 10X - 8X = -31000+37000 2X = 6000 X = 3000 Units At this volume both the alternatives have an equal loss of 7,000 $. c. Volume given is 15,000 Units Alternative A Alternative B No. of units 15000 15000 Sale Price/Unit 19 19 Variable Price/Unit 9 11 Gross Profit/unit 10 8 Gross Profit in $ 150000 120000 Fixed Overheads $ 37000 31000 Net Profit $ 113000 89000 From the analysis, it is clear that Alternative A would yield a higher profit as compared to Alternative B by 24,000 $.