A small firm intends to increase the capacity of a bottleneck operation by addin
ID: 464543 • 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 $39,000 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 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 $39,000 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.
Explanation / Answer
a. break even points can be calculated as below
Cost of production would be same for both alternatives A and B
lets consider X units is the break even quantity
Consider the cost of A = 39000 ( Fixed cost ) + 10 * X
cost of B = 30000 + 11 *B
39000 ( Fixed cost ) + 10 * X = 30000 + 11 * X
X = 9000 Units .
So the break even quantity is 9000 units
b. At break even point both the alternatives yeild same profit as cost is same
consider the cost of A = 39000 + 10 * 9000 = 39000 + 90000 = $ 129000
Total revenue at break even = $ 15 ( price per unit ) * 9000 ( number of units ) =$ 135000
Profit = 135000 - 129000 = $ 6000
c. if the number of units are 16000 units
cost of alternative A = 39000 + 10 * 16000 = 199000
cost of alternative B = 30000 + 11 * 16000 = 206000
So the profit of A = 15 * 16000 - 199000 = 240000 - 199000 = 41000
profit of B = 15 * 16000 - 206000 = 340000
So profit of alternative A is more than alternative B .