A small firm intends to increase the capacity of a bottleneck operation by addin
ID: 332040 • 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, with the associated costs and revenues estimated. Annual fixed costs would be $40,000 for A and $30,000 for B, variable costs per unit would be $10 for A and S1 for B and revenue per unit would be $15 Required: (c) i. Plot the total cost and total revenue lines for alternatives A and B ii Determine the break-even point in units for each alterative. 2 marks 2 marks At what volume of output would the two alternatives yield the same profit? mark iv. If expected annual demand is 12,000 units, which alternative would yield a mark higher profit?Explanation / Answer
1.
Total Cost for Option A= $40000+No. of Units * $10
Total Cost for Option B= $30000+No. of Units * $11
Revenue for Option A or Option B = No. of Units *$15
2. Calculation for Break Even quantities
3. For Same Profit following formula will be applicable on quantity
=> $40000+No. of Units *$10= $30000+No. of Units *$11
i.e. for that quantity total cost has to be same.
Therefore on solving the above we get the same cost on 10,000 units.
4. Apply the same formula of Total Cost the we get Option A is cheaper (Total Cost =$160000) for 12000 quanity with respect to Option B (Total Cost =$162000). Since the Total Revenue =$15*12000=$180000 would be same in case of both the options. Therefore for higher profit we should take Option A.
Therefore for higher profit we should use option A
All Value in $ Option A Option B Fixed Cost 40000 30000 VC of each unit 10 11 Revenue Each item 15 15 Margin each unit 5 4 Break Even Quanity 8000 7500