A small firm intends to increase the capacity of a bottleneck operation by addin
ID: 386638 • 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 $36,000 for A and $31,000 for B; variable costs per unit would be $7 for A and $11 for B: and revenue per unit would be $17. a. Determine each alternative's break-even point in units. (Round your answer to the nearest whole amount.) OBEP, A units units , b. At what volume of output would the two alternatives yield the same profit? (Round your answer to the nearest whole amount.) Punits c. If expected annual demand is 14,000 units, which alternative would yield the higher profit? Higher profit (Cick to select)Explanation / Answer
a)
Contribution per unit
= Selling price per unit – Variable costs per unit
Alternative A
= $17 - $7
= $10 per unit
Alternative B
= $17 - $11
= $6 per unit
Break even point
= (Fixed costs / Contribution margin per unit)
Alternative A
= $36,000 / $10
= 3,600 units
Alternative B
= $31,000 / $6
= 5,167 units
b)
At crossover point, both the alter natives will give same profit / loss
Crossover point
= (Difference in Fixed costs) / (Difference in variable costs per unit)
= ($36,000 - $31,000) / ($11 - $7)
= $5,000 / $4
= 1,250 units
c)
If the quantity is above crossover point, the alternative having lower variable costs per unit will give the higher profit. This is because the alternative having lower variable costs will contribute more towards profits and fixed costs remaining the same, it will result in higher profit
So, Alternative A having lower variable costs per unit will result in higher profit at 14,000 units which is above the crossover point of 1,250 units