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Document7 - Microsoft Word References Mailings Review View Developer x'. Ar , A , ilt. Heading 21 x, TNormal TNo Spaci. Heading 1 Title Subtitle subtle Em. Empha Font Paragraph Styles 4 I. A companyis considering investing in one of the production processes identified below. The company anticipates charging $12 each for each new unit of output it will produce First process/FC-170,000 VC-7S/unit Second process FC 200.000 VC =$6/unit a. Determine the break-even level of output for each of the processes. b. If the company CFO, "Rowdy Rob Robert's goal is to make a target profit of $100,000, determine which process requires producing and selling the smaller quantity to achieve this target. c. Suppose the company'snew CEO, "Trembling Joe Green thinks that a profit of $50,000 is a safer bet than the CFO's estimate. Overruling the CFO, Green wants to know which process requires a lower level of production to achieve his target profit.Explanation / Answer
Processes
FC
VC/unit
selling price/unit
1
$ 170,000
$ 7
$ 12
2
$ 200,000
$ 6
$ 12
a. at break-even: total revenue=total cost
Let q be the brek-even quantity.
Process 1:
Total revenue = 12*q
total cost = 170000+7q
hence,
12q=170000+7q
solving for q:
5q=170000
breakeven level of output for process 1 =
34,000
units
Process 2:
12q=200000+6q
solving for q:
6q=200000
breakeven level of output for process 2 =
33,333.33
units
b. Target Profit =
$ 100,000
Profit = Sales - Cost
Process 1
100000= 12q-(170000+7q)
solving for q:
270000=5q
q
54,000
units
Process 2
100000=12q-(200000+6q)
solving for q:
300000=6q
q
50,000
units
Hence, to make a target profit of $100,000, Process 2 requires producing and selling the smaller quantity.
c. Target Profit =
$ 50,000
Profit = Sales - Cost
Process 1
50000= 12q-(170000+7q)
solving for q:
220000=5q
q
44,000
units
Process 2
50000=12q-(200000+6q)
solving for q:
250000=6q
q
41,667
units
Hence, to make a target profit of $50,000, Process 2 requires producing and selling the smaller quantity.
Processes
FC
VC/unit
selling price/unit
1
$ 170,000
$ 7
$ 12
2
$ 200,000
$ 6
$ 12
a. at break-even: total revenue=total cost
Let q be the brek-even quantity.
Process 1:
Total revenue = 12*q
total cost = 170000+7q
hence,
12q=170000+7q
solving for q:
5q=170000
breakeven level of output for process 1 =
34,000
units
Process 2:
12q=200000+6q
solving for q:
6q=200000
breakeven level of output for process 2 =
33,333.33
units
b. Target Profit =
$ 100,000
Profit = Sales - Cost
Process 1
100000= 12q-(170000+7q)
solving for q:
270000=5q
q
54,000
units
Process 2
100000=12q-(200000+6q)
solving for q:
300000=6q
q
50,000
units
Hence, to make a target profit of $100,000, Process 2 requires producing and selling the smaller quantity.
c. Target Profit =
$ 50,000
Profit = Sales - Cost
Process 1
50000= 12q-(170000+7q)
solving for q:
220000=5q
q
44,000
units
Process 2
50000=12q-(200000+6q)
solving for q:
250000=6q
q
41,667
units
Hence, to make a target profit of $50,000, Process 2 requires producing and selling the smaller quantity.
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