A small firm intends to increase the capacity of a bottleneck operation by addin
ID: 400567 • Letter: A
Question
A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Tow alternatives, A and B, have been identified, and the associated costs and revenues have been 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 $11 for B; and revenue per unit would be $15. A. Determine each alternatives break-even point in units. B. At what volume of output would the two alternatives yield the same profit? C. If expected annual demand is 12,000 units, which alternative would yield the higher profit? Please show all work.Explanation / Answer
a) for A, break-even = $40000/($15 - $10) = 8000 units for B, break-even = $30000/($15 - $11) = 7500 units b) Let the point be for Q units so, ($15 - $10)*Q - $40000 = ($15- $11) *Q -$30000 or Q = 10000 c) for Q = 12000 profit A = $20000 profit B = $18000 A gives higher profit