3) (Based on Solved Problem 1, p. 90.) Joe Jenkins, owner of Jenkins Manufacturi

Question

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

3)

The information we have is FC = 32900 and VC = 45. We also have the SP = 70.

3.1) Number of break-even units = FC / (SP – VC) = 32900 / (70-45) = 940 units

3.2) Profit contribution = Number of units * (SP – VC) – FC = 3120*35 – 32900 = 76300

4)

The information that we have from problem 1 is that the fixed cost (FC1) is 40000 and the variable cost (VC1) is 50. The new information in problem 4 says that we have new fixed cost (FC2) as 49900 and the new variable cost (VC2) as 24.

4.1) The indifference point is calculated by (FC1-FC2) / (VC2-VC1) = (40000-49900)/(24-50) = 9900/26 = 380.76 units. Rounding it we can say it is 381 units.

4.2) Profit contribution 1 = 381*(70-50) – 40000 = -32380

Profit contribution 2 = 381*(70-24) – 49900 = -32374

Ideally it should be exactly the same however we are getting slight variation in the profit contribution due to rounding up the number of units. The selling price is identical for both the plans. The cost are identical at the point indifference. Thus the contribution of profit will be the same.

P.S. Your question 4 says that it is based on problem 2 and then again it says it is based on problem 1. It is not clear thus I am assuming that the correct one is problem 1. In case it is problem 2, all you need to do is replace the values of VC1 and FC1 with the problem 2 values.

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