by using Break-Even Analysis solve the folowing questions: A firm is about to un
ID: 329404 • Letter: B
Question
by using Break-Even Analysis solve the folowing questions:
A firm is about to undertake the manufacture of a and is weighing three capacity lternatives: small job shop, large ixed costs of $3,000 per month, and variable costs of S10 per he repetitive costs of $12,000 per month and variable costs of $4 per unit. has fixed costs of $24,000 and variable costs of S1 per unit joh shop, and repetitive manufacturing. The small job shop has shop has fixed unit. The lrger job manufacur ng plant ) Which alternative should the firm choose if the demand for the product is expeet units per month? (3 points) for the product is expected to be 4200 b) Identify the demand ranges where each capacity choice should the firm make. CExplanation / Answer
Given values:
Small job shop: Fixed costs = $3,000 per month, Variable costs = $10 per unit
Large job shop: Fixed costs = $12,000 per month, Variable costs = $4 per unit
Repetitive manufacturing plant: Fixed costs = $24,000, Variable costs = $1 per unit
Solution:
(a) For demand = 4,200 units per month, total cost of each alternative is calculated as;
Total cost = Fixed cost + (Variable cost x Number of units)
Small job shop:
Total cost = $3,000 + ($10 x 4200) = $45,000
Large job shop:
Total cost = $12,000 + ($4 x 4200) = $28,800
Repetitive manufacturing:
Total cost = $24,000 + ($1 x 4200) = $28,200
The firm should choose Repetitive manufacturing if the demand for the product is expected to be 4,200 units per month because of the lowest total cost of repetitive manufacturing plant of $28,200.
(b) The demand ranges where each capacity choice the firm should make is computed as below:
Of the given three capacity alternatives, small job shop, large job shop and repetitive manufacturing, small job shop has the lowest fixed cost. Therefore, if only 1 unit of output is produced per month, small job shop will yield the lowest cost.
Now, let us assume that the total units of output produced is x units.
The break-even point between small job shop and large job shop is calculated as;
3000 + 10x = 12000 + 4x
Solving for x, we get;
6x = 9000
x = 1,500 units
Small job shop would yield the lowest cost for output 0 to 1,500 units.
The break-even point between large job shop and repetitive manufacturing plant is calculated as;
12000 + 4x = 24000 + x
Solving for x, we get;
3x = 12000
x = 4,000 units
Large job shop would yield the lowest cost for output 1,500 to 4,000 units.
For all quantities above 4,000 units, repetitive manufacturing plant would yield the total lowest cost.
The demand ranges are summarized as below:
Small job shop: 0 to 1,500 units
Large job shop: 1,500 to 4,000 units
Repetitive manufacturing: 4,000 units and above
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