Problem 5-4 A small firm intends to increase the capacity of a bottleneck operat

Question

Problem 5-4

A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two alternatives, A and B, have been identified, and the associated costs and revenues have been estimated. Annual fixed costs would be $36,000 for A and $35,000 for B; variable costs per unit would be $7 for A and $11 for B; and revenue per unit would be $20.

a. Determine each alternative’s break-even point in units. (Round your answer to the nearest whole amount.)

b. At what volume of output would the two alternatives yield the same profit? (Round your answer to thenearest whole amount.)

Profit             units

c. If expected annual demand is 16,000 units, which alternative would yield the higher profit?

Higher profit              (Click to select)   A   B

Explanation / Answer

a. BEP= fixed cost/selling price- variable cost

fixed cost of A= $36,000, variable cost= $7, and sales price= $20

BEP= 36000/ 20-7= 36000/13= 2769.23 units (take it as 2769 units)

BEP of B= 35000/20-11= 35000/9= 3888.8 (take it as 3889 units)

b. these two units provides profits at differnent levels, but at same volume of production they can not provide same amount of profits. at different production levels, they may provide equal profit.

c. if the demand is for 16000 units,

the profit from alternative A=

total variable cost + total fixed cost= 16000*7= $112,000 +36000= $148,000

total revenue at sales of 16000= 16000*20= $320,000

total profit of A= 320,000-148,000= $172,000

total profit of B= 16000*11= 176,000+35000=$211,000

= 320,000-211,000= $109,000

at the sales level alternative A is better than B

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