small business company is considering updating the current production line. Ther
ID: 432635 • Letter: S
Question
small business company is considering updating the current production line. There are two plans. For plan A, the fixed cost will be $42,000 and the variable cost will be $28 per unit after the update. For plan B, the fixed costs will be $45,000 and the variable cost will be $25 per unit after the update. Please answer the following questions: (a) Suppose the selling price is $40, what is the break even volume for each plan? Whiph plan has a lower break-even volume? (b) Suppose the selling price is $40. Also, the company aims to achieve a profit of $18,000 after the update. What selling volume will be required to achieve the profit for each plan? Which plan has a lower volume?Explanation / Answer
(a) Break even volume = fixed costs / (Revenue per unit - variable cost per unit)
For plan A, Break even volume = 42,000 / (40-28) = 3500 units
For plan B, Break even volume = 45,000 / (40-25) = 3000 units
Therefore, plan B has lower break even volume.
(b) Selling volume for profit = ( fixed cost + profit ) / (Revenue per unit - variable cost per unit)
For plan A, volume for profit = (42,000 + 18,000) / (40-28) = 5000 units
For plan B, volume for profit = ( 45,000 + 18,000) / (40-25) = 4200 units
Therefore, plan B requires lower volume to achieve the profit of $18,000.
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