A small firm intends to increase the capacity of a bottleneck operation by addin
ID: 2783645 • 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 $39,000 for A and $30,000 for B; variable costs per unit would be $10 for A and $11 for B; and revenue per unit would be $15. a. Determine each alternative's break-even point in units. (Round your answer to the nearest whole amount.) QBEPA QBEPB units units b. At what volume of output would the two alternatives yield the same profit? (Round your answer to the nearest whole amount.) Profit units c. If expected annual demand is 16,000 units, which alternative would yield the higher profit? Higher profit (Click to select)Explanation / Answer
Breakeven Quantity for A = Fixed COst/ (Revenue - Variable Cost)
Breakeven Quantity for A = 39,000/ (15 - 10)
Breakeven Quantity for A = 7,800
Breakeven Quantity for B = Fixed COst/ (Revenue - Variable Cost)
Breakeven Quantity for B = 30,000/ (15 - 11)
Breakeven Quantity for B = 7,500
Part B:
Let quantity be Q
Q * (15 - 10) - 39,000 = Q * (15 - 11) - 30,000
Q = 9,000 units
Part C:
Profit for A = 16,000 * (15 - 10) - 39,000
Profit for A = 41,000
Profit for B = 16,000 * (15 - 11) - 30,000
Profit for B = 34,000
A will be preferred at 16,000 units