1) Perfect Furniture is a manufacturer of kitchen tables and chairs. The company
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Question
1) Perfect Furniture is a manufacturer of kitchen tables and chairs. The company is currently deciding between two new methods for making kitchen tables. The first process is estimated to have a fixed cost of $77100 and a variable cost of $79 per unit. The second process is estimated to have a fixed cost of $101000 and a variable cost of $59 per unit.
1.1 What volume of production is the point of indifference? units
1.2 If the company produces 1360 tables per year, which method provides a lower total cost?
Process 1or Process 2
2 )Med-First is a medical facility that offers outpatient medical services. The facility is considering offering an additional service, mammography screening tests, on-site. The facility estimates the annual fixed cost of the equipment and skills necessary for the service to be $117,000. Variable costs for each patient processed are estimated at $36 per patient.
2.1 If the clinic plans to charge $57 for each screening test, how many patients must it process a year in order to break even? patients
2.2 Med-First estimates that the maximum number of patients it could serve in a year is 6400. What is the contribution to profit at this number of patients? $
3) (Based on Solved Problem 1, p. 90.)
Joe Jenkins, owner of Jenkins Manufacturing, is considering whether to produce a new product. He has considered the operations requirements for the product as well as the market potential. Joe estimates the fixed costs per year to be $32900 and variable costs for each unit produced to be $45.
3.1 If Joe sells the product at a price of $70, how many units of product does he have to sell in order to break even? units
3.2 If Joe sells 3120 units at the product price of $70, what will be his contribution to profit? $
4) (Based on Solved Problem 2, p. 90.)
Joe Jenkins, owner of Jenkins Manufacturing, has decided to produce the new product discussed in Problem 1. The product can be produced with the current equipment in place. However, Joe is considering the purchase of new equipment that would produce the product more efficiently. Joe's fixed cost would be raised to $49900 per year, but the variable cost would be reduced to $24 per unit. Joe still plans to sell the product at $70 per unit.
4.1 At what volume are the costs of the current process and the proposed new process the same? (This is called the point of indifference.) units
4.2 At this point of indifference, what is the contribution to profit of either process? $
Explanation / Answer
Ans:
1)
1.1) The point of indifference is 1195 units.
cost indifference point is the point of activity at which there is no difference in cost between two alternative methods.
cost indifference point = difference in fixed cost / difference in variable cost
= ($101000 - $77100) / ($79 - $59)
= $23900 / $20
= 1195 units
Hence the point of indifference is 1195 units.
1.2) when the company produces 1360 tables per year,process 2 provides a lower total cost.
calculation of total cost under each process when the company produces 1360 tables per year.
Hence total cost under process 2 is lower.
Particulars Process1 Process2 Variable cost(variable cost per unit * output) $107,440 $80,240 Fixed cost $77,100 $101,000 Total cost $184,540 $181240Related Questions
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