A manufacturer is evaluation options regarding production equipment. He has thre

Question

A manufacturer is evaluation options regarding production equipment. He has three options:

a. Refurbish the old equipment for a cost of $70,00

b. Make major modification for the existing equipment for a cost of $135,000

c. Purchase a new one for $230,000

The Product sells for $10. However, the variable cost will differ depending on the decison made. If he referbishes, the variable cost will be $7.20. If he makes major modifications, the variable cost per unit is $5.25. Finally, the variable cost per unit for the new equipment is $4.75.

1. a) What is the break even point for purchasing the new equipment.

b) Determine the profit function of each of the three alternatives.

Explanation / Answer

= $230,000 / ( $10 - $4.75 )

= 230,000/5.25

= 43809.52 ( 43810 rounding to nearest whole number )

= Selling price/ unit x Number of units sold – Fixed cost ( Refurbish cost / Modification cost/ Purchase of new equipment cost ) – Variable cost / unit x Number of units sold

Profit function for refurbishing the old equipment

= $10x Number of units sold - $70,000 - $7.2 x Number of units sold

= ( $10 - $7.2) x Number of units sold - $70,000

= $2.8 x Number of units sold - $70,000

Profit function for making major modification to the existing equipment

= $10 x Number of units sold - $135,000 - $5.25 x Number of units sold

= ($10 - $5.25) x Number of units sold - $135,000

= $4.75 x Number of units sold - $135,000

Profit function for purchasing new equipment

= $10 x Number of units sold - $230,000 - $4.75 x Number of units sold

= ( $10 - $4.75) x Number of units sold - $230,000

= $5.25 x Number of units sold - $230,000

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