Problem 1 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...

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Problem 1 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 $40,000 for A and $30,000 for B; variable costs per unit would be $10 for A and $11 for B; and revenue per unit would be $15. a. Find the break-even point for each alternative b. At what volume both alternatives yield the same profit? c. If the volume change (5000, 10000,12000, 15000 and 20000) and the monthly fixed costs increase by (500, 100 and 1500), perform a 2-way sensitivity analysis and draw the proper conclusions on what alternative you would recommend based on the profit. Problem 2 A manager must decide how many machines of a certain type to purchase. Each machine can process 100 customers per day. One machine will result in a fixed cost of $2,000 per day, while two machines will result in a fixed cost of $3,800 per day. Variable costs will be $20 per customer, and revenue will be $45 per customer. a. Find the break-even point for each of the two options (one machine vs. two machines) b. If the estimated demand is 90 to120 customers per day, should the manager purchase one or two machines?

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Answered Same DaySep 04, 2021

Answer To: Problem 1 A small firm intends to increase the capacity of a bottleneck operation by adding a new...

Nitish Lath answered on Sep 05 2021

149 Votes

Solution 1:
a. Break even at each alternative:
    Particulars
    Project A
    Project B
    Annual fixed costs
    40000
    30000
    Revenue per unit
    15
    15
    Variable cost per unit
    10
    11
    Contribution margin per unit
    5
    4



    Break- even point (units) (fixed cost/ contribution margin per unit)
    8000
    7500
b. Calculation of volume yielding same profit:
(Contribution margin for A* units sold)- fixed costs for A = (Contribution margin for B* units)- fixed cost for B
(5* units sold)- 40000= (4* units sold) – $30,000
(5* units sold) = (4* units sold) – $30,000+ $40,000
(5* units sold) = (4* units sold) + $10,000
(5* units sold) - (4* units sold) = 10000
Units at same level profit = 10000 units
c. Sensitivity analysis:
For project A:
    Volume level
    5000
    10000
    12000
    15000
    20000
    Contribution margin per unit
    5
    5
    5
    5
    5
    Contribution margin
     25,000
     50,000
     60,000
     75,000
     1,00,000
    Less: Fixed costs
     40,000
     40,000
     40,000
     40,000
     40,000
    Net income
     -15,000
     10,000
     20,000
     35,000
     60,000






    If fixed cost increased by 6000 (12 *500)
     -21,000
     4,000
     14,000
     29,000
     54,000
    If fixed cost increased by 1200 (12*100)
     -16,200
     8,800
     18,800
     33,800
     58,800
    If fixed cost increased by 18000 (12*1500)
     -33,000
     -8,000
     2,000
     17,000
     42,000
The...

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Problem 1 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...

Answer To: Problem 1 A small firm intends to increase the capacity of a bottleneck operation by adding a new...

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