Problem 5-4 A small firm intends to increase the capacity of a bottleneck operat
ID: 346831 • Letter: P
Question
Problem 5-4 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 $36,000 for A and $35,000 for B; variable costs per unit would be $7 for A and $11 for B; and revenue per unit would be $20 a. Determine each alternative's break-even point in units. (Round your answer to the nearest whole amount.) QBEP,A QBEP, B 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 esece oe Higher profit Click to select)Explanation / Answer
a. Breakeven point is calculated as: BEP = Fixed costs/(Sales revenue-variable cost) Units
Thus, QBEP,A = 36000/(20-7) = 2679 Units & QBEP,B = 35000/(20-11) = 3889 Units
b. Let the volume at which the two profits are equal be V. Then we have:
20V - 7V - 36000 = 20V-11V-35000 => 4V = 1000 => V = 250
Therefore, at 250 units, the two alternatives yield the same profit.
c. Calculating profit for Alternative A:
Profit = Revenue - Costs = (20*16000) - ((7*16000)+36000) = $172,000
Profit for Alternative B:
Profit = (20*16000) - ((11*16000)+35000) = $109,000
Thus, Alternative A will yield higher profit of $ 172,000