Stapleton Manufacturing intends to increase capacity through the addition of new

Question

Stapleton Manufacturing intends to increase capacity through the addition of new equipment. Two vendors have presented proposals. The fixed cost for proposal A is $61,000, and for variable cost for A is $9, and for B, $14. The revenue generated by each unit is $16. a) What is the crossover point for the two options? The crossover point for the two options is units. b) At an expected volume of 3,600 units, which alternative should be chosen? The profit (loss) if proposal A is accepted and 3,600 units are produced is $ The profit (loss) if proposal B is accepted and 3,600 units are produced is $. should be chosen at an expected volume of 3,600 units.

Explanation / Answer

Fixed cost of A = $61,000

Fixed cost of B = $33,000

Now ,

Margin per unit for A = 16 - 9 = $7/unit

Margin per unit for B = 16 - 14 = $2/unit

a) Crossover point -

For crossover point, profit of A = profit of B

7x-61000 = 2x-33000

=> 5x = 28000

=> x = 5600 units

b) At an expected production of 3600 units,

Profit(loss) of A = 3600x7 - 61000 = - $35,800 [LOSS]

Profit(loss) of B = 3600x 2 - 33000 = - $25,800 [LOSS]

So, we must choose proposal B as it has lower loss

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