ariable cost of S16, with a capacity of T8,000 lits pul Machine B is slower, wit
ID: 358486 • Letter: A
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ariable cost of S16, with a capacity of T8,000 lits pul Machine B is slower, with a speed of one-half of A's, but the fixed cost is only $60,000. The variable cost will be higher, at $20 per unit. Each unit is expected to sell for $28. a) What is the crossover point (point of indifference) in units for ut the fixed ) a s 0 per d) sor Probl the two machines? b) What is the range of units for which machine A is prefer in Pro able? c) What is the range of units for which machine B is preferable?7. Probl .. 7.12 Stapleton Manufacturing intends to increase capac- ity through the addition of new equipment. Two vendors have7. presented proposals. The fixed cost for proposal A is $65,000, and mapp for proposal B, $34,000. The variable cost for A is $10, and for B, ment S14. The revenue generated by each unit is $18. mpr CASE STUD Rochester Manufacturing's Process Decision Rochester Manufacturing Corporation (RMC) is considering moving some of its production from traditional numerically con- trolled machines to a flexible manufacturing system (FMS). Its Thro this reduExplanation / Answer
To be calculated:
(a) Crossover point
(b) Better alternative at an expected volume of 8,300 units
Given values:
Proposal A, Fixed cost = $65,000
Proposal A, Variable cost = $10
Proposal B, Fixed cost = $34,000
Proposal B, Variable cost = $14
Revenue = $18 per unit
Solution:
(a) The crossover point is defined as the volume where the total costs for proposal A will become equal to the total costs for proposal B.
Crossover point is calculated as;
Total cost for proposal A = Total cost for proposal B
Let the volume = X units
Crossover point;
$65000 + 10X = $34000 + 14X
4X = $31000
X = 7,750 units
The crossover point for the two options = 7,750 units
(b) For a volume of 8,300 units, the total costs for each of the proposal is calculated as;
Proposal A:
Total costs = Fixed costs + (Variable cost x Volume)
Total costs = $65000 + ($10 x 8300)
Total costs = $148,000
Total Revenue = 8,300 x $18 = $149,400
Profit = Total Revenue - Total costs
Profit = $149,400 - $148,000
Profit under proposal A = $1,400
Proposal B:
Total costs = Fixed costs + (Variable cost x Volume)
Total costs = $34000 + ($14 x 8300)
Total costs = $150,200
Total Revenue = 8,300 x $18 = $149,400
Profit = $149,400 - $150,200
Profit under proposal B = - $800 (loss of $800)
At an expected volume of 8,300 units, Proposal A should be chosen.
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