You are the operations manager for Louisiana Sporting Goods Co. The company has

Question

You are the operations manager for Louisiana Sporting Goods Co. The company has designed new "oyster shucking" knife that is expected to reduce risk of injury to the user. Your firm plans to begin production of these knives soon. Either of two machines (processes), A or B could be used for in-house production. Machine A would have a fixed cost of $60,000 and a variable cost of $5 per unit produced, and B would have a fixed cost of $80,000 but a variable most of $3 per unit. Each knife is expected to sell for $15. Determine the range of annual "volume of business Q" for which each of the two alternatives would be optimal i.e. best. Hint: Compute various break-even points for your evaluation

Explanation / Answer

Calculate Point of Indifference between A and B Machine

TC(A) = TC(B)

FC + (VC*Q) = FC + (VC*Q)

60000 + (5 * Q) = 80000 + (3 * Q)

Q = 10,000

Compare the cost at different Quantity

A would be optimal when Q <= 10,000

B would be optimal when Q >= 10,000

Q TC(A) = FC + (VC*Q) TC(B) = FC + (VC*Q) 9000 105000 107000 10000 110000 110000 11000 115000 113000

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