Prope?? The Gatson manufacturing company has estimated the following components

ID: 3054808 • Letter: P

Question

Prope?? The Gatson manufacturing company has estimated the following components for a new product. Fixed cost = $50,000 Material cost per unit = $2.15 Labor cost per unit = $2.00 Revenue per unit = $7.50 1. Using the spreadsheet model, what will be the resulting profit if the company decides to make 70,000 units of the new product? 2. Construct a one-way data table with production volume as the column input and profit as the output. Breakeven occurs when profit is zero. Vary production volume from 0 to 100,000 in increments of 10,000. In which interval of production volume does breakeven occur? Interpret your results. 3. Using the appropriate Excel tool, find the exact breakeven point. Interpret your results.

Explanation / Answer

Solution

Profit, P = Rx – (F + Lx + Mx) = x(R - L - M) – F…………………………..(1),

where

x = production units,

R = revenue ($ per unit)

L = labour cost ($ per unit)

M = material cost ($ per unit)

F = Fixed cost ($)

Preparatory Work

Given R = $7.50 per unit)

L = $2.00 per unit

M = $2.15 per unit

F = $50000

So, vide (1) above, P = 3.35x – 50000 ……………………………………………(2)

Part (1)

Substituting x = 70000 in (2) above, P70000 = $184500 ANSWER

Part (2)

Excel output for P vs x with x = 0(10000)100000 in (2) above, is given below:

P = 3.35x – 50000

3.35

-50000

10000

-16500

20000

17000

30000

50500

40000

84000

50000

117500

60000

151000

70000

184500

80000

218000

90000

251500

100000

285000

ANSWER 1

From the above table, P is negative for x = 10000 and positive for x = 20000. Implies,

Break-even production is between 10000 and 20000 ANSWER 2

Part (3)

For actual break-even production, P = 0. Substituting P = 0 in (2) above, 3.35x = 50000 or

x = 14925.4. So, actual break-even production is 14926 ANSWER