(2) A manager is trying to decide between renting space at Facility A, Facility

Question

(2) A manager is trying to decide between renting space at Facility A, Facility B, or Facility C. If at Facility A, the costs will be $4 per item produced plus a flat fee of $4,000 per production period. Facility B has a flat rate of $52,000 per production period. Facility C has a flat rate of $8,000 per production period and a cost of $3 per item for any production levels beyond 5,000 items. If production levels for any period are expected to be $10,000, answer the questions below.

A. At which facility should the manager rent space?

B. If the manager takes your advice (from part A), how much will the manager save compared to the other 2 facility options?

C. Supposing that production volume may change in the future, at what production level (in units) would the costs of Facility A and B be equivalent?

D. Suppose that the manager decides to rent from facility A. If the units will sell for $11 each, how many units will need to be sold to break even?

Explanation / Answer

A. Facility A = ($4 * 10000) + $4000 = $44000

Facility B = $52000

Facility C = $8000 + $3 * (10000-5000) = $23000

Facility C is the best

B. If Facility C is chosen, the manager would save:

$52000 - $23000 = $29000 as compared to Facility B

$44000 - $23000 = $21000 as compared to Facility A

C. Suppose production be x, then for Facility A & B to be equivalent, production would be:

($4 * x) + $4000 = $52000

4x = 48000

x = 12000 units

D. Suppose units as x. For breakeven:

Sales price = Cost

11x = ($4 * x) + $4000

7x = 4000

x = 571 units

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