A small firm intends to increase the capacity of a bottleneck operation by addin
ID: 394516 • 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 $18.
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 $18.
Explanation / Answer
Machine: A
Machine: B
Annual Fixed Cost (FC) = $36,000
Annual Fixed Cost (FC)=$31,000
Variable Costs Per Unit (VC)=$7
Variable Costs Per Unit (VC)=$11
Revenue Per Unit (R)=$18
Revenue Per Unit (R)=$18
a.
QBEP = FC
R – VC
Machine: A Machine: B
QBEP = FC QBEP = FC
R – VC R – VC
QBEP = 36,000 QBEP = 31,000
18-7 18 – 11
QBEP = 36,000 QBEP = 31,000
11 7
QBEP = 3272 units QBEP = 4429 units
b.
Profit = Q (R -VC) - FC
Profit A = Profit B
Q (R - VC) - FC = Q (R - VC) - FC
Q (18-7) - 36,000 = Q (18-11) - 31,000
Q (11) - 36,000 = Q (7) - 31,000
Q =1250 units.
C.
Given:
Expected annual demand is 15,000 units
Profit A
Profit A = Q (R - VC) - FC
Profit A = 15, 000 (18 -7) - 36,000
Profit A = 15,000 (11) - 36,000
Profit A = $1, 29,000
Profit B
Profit B = Q (R - VC) - FC
Profit B = 15,000 (18 - 11) - 31,000
Profit B = 15,000 (7) - 31,000
Profit B = $74,000
“A” will yield the higher profit.
Machine: A
Machine: B
Annual Fixed Cost (FC) = $36,000
Annual Fixed Cost (FC)=$31,000
Variable Costs Per Unit (VC)=$7
Variable Costs Per Unit (VC)=$11
Revenue Per Unit (R)=$18
Revenue Per Unit (R)=$18