Homework SourseA small firm intends to increase the capacity of a bottlenec
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 $37,000 for A and $35,000 for B; variable costs per unit would be $8 for A and $11 for B; and revenue per unit would be $16.
| 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 $37,000 for A and $35,000 for B; variable costs per unit would be $8 for A and $11 for B; and revenue per unit would be $16. |
Solution
A)
For Alternative A, break even point in units
QBEP,A = 37,000 / ( 16- 8) = 4625
QBEP,B = 35,000 / (16-11) = 7000
At what volume of output would the two alternatives yield the same profit?
A= x* 8 - 37000
B = x*5-35000
8x - 37000 = 5x-35000
3x= 2000
x = 666.66 = 667
If expected annual demand is 13,000 units, which alternative would yield the higher profit?
A= 13,000 x 8 - 37000 = 67000
B = 13000 x 5 -35000 = 30000
A yields higher profits
| b. | At what volume of output would the two alternatives yield the same profit? A= x* 8 - 37000 B = x*5-35000 8x - 37000 = 5x-35000 3x= 2000 x = 666.66 = 667
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