A small firm intends to increase the capacity of a bottleneck operation by addin
ID: 3339856 • Letter: A
Question
A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two alternatives, A & B, have been identified, and the associated costs and revenues have been estimated. Annual fixed costs would be $50,000 for A and $45,000 for B; variable costs per unit would be $20 for A and $25 for B; and revenue per unit would be $30. Determine each alternative's break-even point in units. A. Alternative A: 8,000 units Alternative B: 7,500 units B. Alternative A: 7,500 units Alternative B: 8,000 units C. Alternative A: 5,000 Alternative B: 9,000 D. Alternative A: 9,000 Alternative B: 5,000
Explanation / Answer
For A
Revenue = Fixed costs + Variable costs
30*N = 50000 + 20*N
N = 50000/10 = 5000 units
For B
30*N = 45000 + 25*N
N = 45000/5 = 9000 units
Answer: Option C