A small firm intends to increase the capacity of a bottleneck operation by addin
ID: 470876 • 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 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.
Explanation / Answer
a)
break even of A= 36000 + 7Q = 17Q, this implies Q= 3600
break even of B = 31000 + 11Q = 17Q, this implies Q = 5167
b) equating the profits of both the firms
17Q - (36000 + 7Q) = 17Q - (31000+ 11Q), this implies 4Q = 5000, Q=1250
c) profit from A = 17*14000 - (36000 + 7*14000) = 104000
profit from B = 17*14000 - (31000 + 11*14000) = 53000
A is more profitable