Zan Azlett and Angela Zesiger have joined forces to start A&Z Lettuce Products, a processor of packaged shredded lettuce for institutional use. Zan has years of food processing experience, and Angela has extensive commercial food preparation experience. The process will consist of opening crates of lettuce and then sorting, washing, slicing, preserving and finally packaging the prepared lettuce. Together, with help from vendors, they feel they can adequately estimate demand, fixed costs, revenues and variable cost per bag of lettuce. They think a largely manual process will have monthly fixed costs of $36,000 and variable costs of $1.75 per bag. A more mechanized process will have fixed costs of $75,000 per month with variable costs of $1.00 per bag. They expect to sell the shredded lettuce for $2.75 per bag.
(a) What is the break-even quantity for the manual process?
(b) What is the revenue at the break-even quantity for the mechanized process?
(c) What is the break-even quantity for the mechanized process?
(d) What is the revenue at the break-even quantity?
(e) What is the monthly profit or loss of the manual process if they expect to sell 60,000 bags of lettuce per month?
(f) What is the monthly profit or loss of the mechanized process if they expect to sell 60,000 bags of lettuce per month?
(g) At what quantity would Zan and Angela be indifferent to the process selected?
(h) Over what range of demand would the manual process be preferred over the mechanized process? Over what range of demand would the mechanized process be preferred over the manual process?
Zan Azlett and Angela Zesiger have joined forces to start A&Z Lettuce Products, a processor of packaged shredded lettuce for institutional use. Zan has years of food processing experience, and Angela has extensive commercial food preparation experience. The process will consist of opening crates of lettuce and then sorting, washing, slicing, preserving and finally packaging the prepared lettuce. Together, with help from vendors, they feel they can adequately estimate demand, fixed costs, revenues and variable cost per bag of lettuce. They think a largely manual process will have monthly fixed costs of $36,000 and variable costs of $1.75 per bag. A more mechanized process will have fixed costs of $75,000 per month with variable costs of $1.00 per bag. They expect to sell the shredded lettuce for $2.75 per bag.
(a) What is the break-even quantity for the manual process?
(b) What is the revenue at the break-even quantity for the mechanized process?
(c) What is the break-even quantity for the mechanized process?
(d) What is the revenue at the break-even quantity?
(e) What is the monthly profit or loss of the manual process if they expect to sell 60,000 bags of lettuce per month?
(f) What is the monthly profit or loss of the mechanized process if they expect to sell 60,000 bags of lettuce per month?
(g) At what quantity would Zan and Angela be indifferent to the process selected?
(h) Over what range of demand would the manual process be preferred over the mechanized process? Over what range of demand would the mechanized process be preferred over the manual process?
Zan Azlett and Angela Zesiger have joined forces to start A&Z Lettuce Products, a processor of packaged shredded lettuce for institutional use. Zan has years of food processing experience, and Angela has extensive commercial food preparation experience. The process will consist of opening crates of lettuce and then sorting, washing, slicing, preserving and finally packaging the prepared lettuce. Together, with help from vendors, they feel they can adequately estimate demand, fixed costs, revenues and variable cost per bag of lettuce. They think a largely manual process will have monthly fixed costs of $36,000 and variable costs of $1.75 per bag. A more mechanized process will have fixed costs of $75,000 per month with variable costs of $1.00 per bag. They expect to sell the shredded lettuce for $2.75 per bag.
(a) What is the break-even quantity for the manual process?
(b) What is the revenue at the break-even quantity for the mechanized process?
(c) What is the break-even quantity for the mechanized process?
(d) What is the revenue at the break-even quantity?
(e) What is the monthly profit or loss of the manual process if they expect to sell 60,000 bags of lettuce per month?
(f) What is the monthly profit or loss of the mechanized process if they expect to sell 60,000 bags of lettuce per month?
(g) At what quantity would Zan and Angela be indifferent to the process selected?
(h) Over what range of demand would the manual process be preferred over the mechanized process? Over what range of demand would the mechanized process be preferred over the manual process?
Solution a:
Selling price = $2.75 per bag
Variable cost of manual process = $1.75
Contribution margin of manual process = $2.75 - $1.75 = $1 per bag
Monthly fixed cost = $36,000
Breakeven quantity of manual process = Fixed cost / contribution margin per unit = $36,000 / $1 = 36000 bags
Solution b:
Contribution margin per unit of mechanized process= $2.75 - $1 = $1.75 per bag
Fixed cost per month = $75,000
Breakeven quantity of mechanized process = $75,000 / $1.75 = 42857 Bag
Revenue at breakeven quantity of mechanized process = Breakeven quantity * Selling price per unit
= 42857 * $2.75 = $117,857
Solution c:
Contribution margin per unit of mechanized process= $2.75 - $1 = $1.75 per bag
Fixed cost per month = $75,000
Breakeven quantity of mechanized process = $75,000 / $1.75 = 42857 Bag
Solution d:
Revenue at breakeven quantity of mechanized process = Breakeven quantity * Selling price per unit
= 42857 * $2.75 = $117,857
Solution e:
Monthly profit or loss of the manual process if they expect to sell 60,000 bags of lettuce per month = Contribution margin - Fixed cost = (60000 * $1) - $36,000 = $24,000
Solution f:
monthly profit or loss of the mechanized process if they expect to sell 60,000 bags of lettuce per month = Contribution margin - Fixed cost = (60000 * $1.75) - $75,000 = $30,000
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