BA381Problem Set 3 CHAPTER 6: 6-1. Part A: Sheila, the plant manager of a metal
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BA381Problem Set 3 CHAPTER 6: 6-1. Part A: Sheila, the plant manager of a metal stamping operation in Wisconsin, is considering changes to her operations. While the business is making modest profits now, she suspects that if the firm invests in a new forming press, it could recognize a substantial increase in profits. The new press costs $249,000 to purchase and install and can press 125 parts per hour (or 1000 per day). Shcila cstimates that with the new press, it will cost $2.95 to press each part. Customers are charged $4.80 per unit a. How many parts will Sheila's operation have to produce to break even? What level of sales revenues would be required? (Calculations are sufficient.) So far, the plant's workload has varied from 350 to 650 units each day. How long would it take to break even on the new press at the low-demand estimate? demand estimate? (Calculations are sufficient.) If the Sales department cuts the price per unit to $4.45, management expects that demand will stabilize at 950 units per day. What is the breakeven point at the new price? How much revenue would be required to break even? How long would it take to break even at the reduced price of $4.45? (Calculations are sufficient.) b. How long at the high- c. d. Compare and contrast the scenario described under Parts a &b; to the scenario outlined in Part c. As the VP of Operations, would you buy the new press and order the price reduction based on these calculations? Explain your rationale. You are on the right track if it takes 385 days to break even at the 350 unit demand level Part B: The company CEO is confident that the price reduction cited in Item c will cause consumer demand to increase to 950 units per day as Sales has predicted. She has speculated that the company might be able to serve the larger firms in the automotive supply chain given the press' higher capacity. With that in mind, she has asked Sheila to consider an even larger -and more expensive machine. The cost to purchase and install the high capacity press would rise to $360,000. However, with the more efficient machine, material and labor costs would fall to $2.25 per unit. The anticipated sales price would remain at $4.45 per unit e. What is the breakeven point for this new press in units and in dollars? (Calculations are sufficient.) f. In comparison with Part c, at what volume of demand should management choose the high capacity press? At what volume should they choose the press in Part c? Calculate the point of indifference given Part c and Part e, and describe it in words. (Requires calculations and a written response.) Given the analyses done in Parts a through f, should the CEO call for the new press to be purchased and order the price reduction? Explain your rationale. g. You are on the right track if the break even point in units for Part e is 163636.Explanation / Answer
Part A
a) $249000 + $2.95*N = $4.80*N
N= 134594.6 or 134595 parts
Revenue = $646054
b) Break even on low demand estimate = 134595/350 = 385 days
Break even on High demand estimate = 134595/650 = 207 days
c)
$249000 + $2.95*N = $4.45*N
No. part to break even = 166000
Revenue = 166000* $4.45 = $738700
Duration = 166000/950 = 175 days
d) It is justified to go for a price reduction as in the later case comapny is acheiving break even in mere 175 days comaprative to even high demand state of 650 parts per day when price was $4.80.
Part B
e. $360000 + $2.25*N = $4.45*N
N=163636.36 or 163636 parts
Revenue = $728181
f. Volume of demand
163636/175 = 935 parts per day
Point of indiffrence
$249000 + $2.95*N - $4.45*N = $360000 + $2.25*N - $4.45*N
$111000/0.70= 158571.42
At 158571 parts they would be indiffrent.
g. They should order new machine as the no. of days and no. of parts required are lesser to acheive break even.
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