Zan Azlett and Angela Zesiger have joined forces to start A&Z Lettuce Products,
ID: 344660 • Letter: Z
Question
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 think 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 $37,500 and variable costs of $1.60 per bag. A more mechanized process will have fixed costs of $80,000 per month with variable costs of $1.25 per bag. They expect to sell the shredded lettuce for$2.75 per bag.
a) The break-even quantity in units for the manual process = ?bags (round your response to the nearest whole number). b) The revenue for the manual process at the break-even quantity = $ ? (round your response to the nearest whole number).
c) The break-even quantity in units for the mechanized process = ? bags (round your response to the nearest whole number).
d) The revenue for the mechanized process at the break-even quantity = $ ? (round your response to the nearest whole number).
e) For monthly sales of 60,000 bags, for the option with manual processing, A&Z Lettuce Products will have a profit of $ ?(round your response to the nearest whole number and include a minus sign if the profit is negative).
f) For monthly sales of60,000 bags, for the option with mechanized processing, A&Z Lettuce Products will have a profit of $ ? (round your response to the nearest whole number and include a minus sign if the profit is negative).
g) The quantity at which Zan and Angela are going to be indifferent between the manual and mechanized process = ? bags (round your response to the nearest whole number).
h) If the demand exceeds the point of indifference, then Zan and Angela should prefer the option with mechanized OR manual processing.
If the demand stays below the point of indifference, then Zan and Angela should prefer the option with manual OR mechanized processing.
Explanation / Answer
Total revenue = $2.75 / bag x N bags = $2.75.N1
Total cost = Fixed cost + Variable cost x N = $37500 + $1.6.N1
At breakeven quantity , Total revenue = Total cost
Therefore ,
2.75.N1 = 37500 + 1.6.N1
Or, 1.15.N1 = 37500
Or, N1 = 37500 /1.15
Or, N1 = 32608.69 ( 32609 rounded to nearest whole number )
BREAKEVEN QUANTITY = 32609 BAGS
REVENUE = $89675
Total revenue = $2.75 / bag x N bags = $2.75.N2
Total cost = Fixed cost + Variable cost x N = $80000 +$1.25,N2
At breakeven quantity , Total revenue = Total cost
Therefore ,
2.75.N2 = 80000 + 1.25.N2
Or, 1.5N2 = 80000
Or, N2 = 53333.33 ( 53333 rounded to nearest whole number )
BREAKEVEN QUANTITY = 53333 BAGS
REVENUE FOR MECHANIZED PROCESS AT BREAKEVEN QUNTITY = $146666
Revenue = $2.75 x 60000 = $165,000
Total cost = $37500 + $1.6x 60000 = $37500 + $96000 = $133,500
Profit = Revenue – Total cost = $165,000 - $133,500 = $31,500
A&Z LETTUCE PRODUCT WILL HAVE A PROFIT OF $31,500 WITH MANUAL PROCESSING
Revenue = $2.75 x 60000 = $165,000
Total cost = $80,000 + $1.25.N2 = $80,000 + $ 1.25 X 60,000 = $80,000 + $ 75,000 = $155,000
Profit = Revenue – Total cost = $165,000 - $155,000 = $10,000
A&Z LETTUCE PRODUCT WILL HAVE A PROFIT OF $10,000 WITH MECHANIZED PROCESSING
At quantity of indifference, total cost under both options are going to be same
37500 + 1.6.N3 = 80,000 + 1.25.N3
Or, 0.35.N3 = 42500
Or, N3 = 42500 /0.35
Or, N3 = 121428.57 ( 121429 ROUNDED TO NEAREST WHOLE NUMBER )
QUANTITY OF INDIFFERENCE = 121429
Let the new demand = 130,000
At the new demand level ,
Total cost under manual option = 37500 + 1.6 x 130,000 = 37500 + 208,000 = $245,500
Total cost under mechanized option = $80,000 + $ 1.25 x 130,000 = $80,000 + $162,500 = $242,500
Since total cost under the mechanized option is less , mechanized option should be chosen
IF THE DEMAND EXCEEDS THE POINT OF INDIFFERENCE, THEN JAN AND ANGELA SHOULD PREFER THE OPTION WITH MECHANIZED PROCESSING
IF THE DEMANDSTAYS BELOW THE POINT OF INDIFFERENCE, THEN JAN AND ANGELA SHOULD PREFER THE OPTION WITH MANUAL PROCESSING
BREAKEVEN QUANTITY = 32609 BAGS
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