Q1. The Chocolate factory is “one of a kind in the industry”. The owner decided
ID: 1205274 • Letter: Q
Question
Q1. The Chocolate factory is “one of a kind in the industry”. The owner decided to increase price per unit from $10 to $12 per unit. In addition, he approved the lease of a robotic arm for $750,000 fixed cost in order to cut their variable cost from $4.00 to $3.00 per unit without the pricing analyst review. What will be the results of this strategy if the company sells 200,000 units? Assume the Fixed Cost now is $2,250,000.
a.The strategy will generate profits of $2.4M
b.The strategy will generate losses of $2.4 M
c. The strategy will generate profits of $450K
d. The strategy will generate losses of $450K
Q2. Reasons to replace equipment are:
a. Wear and tear, decreasing reliability
b. Obsolete, not state-of-the-art
c. Not precise enough as per new design specs
d. All of the above
Explanation / Answer
1)
Q = 200,000 units
P1 = $10 P2 = $12
FC1 = 0 FC2 = $2,250,000
VC1 = $4 VC2 = $3
Profit initially: PQ - TC = 2,000,000 - 800,000 = $1,200,000
Profit now: PQ - TC = 2,400,000 - 600,000 - 2,250,000 = -$450,000
Hence, correct option is: d. The strategy will generate losses of $450K
2)
Correct option: (d) All of the above
When an equipment becomes obsolete, wears and tears and lacks in new design standards, then it is required to get it replaced.
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