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 $37,000 for A and $31,000 for B; variable costs per unit would be $9 for A and $11 for B; and revenue per unit would be $19. a. Determine each alternative's break-even point in units. (Round your answer to the nearest whole amount.) QBEP,A QBEP,B units units b. At what volume of output would the two alternatives yield the same profit (or loss)? (Round your answer to the nearest whole amount.) Profit units c. If expected annual demand is 15,000 units, which alternative would yield the higher profit (or the lower loss)? v (Click to select) Higher profit A

Please explain. Thank you for helping

Answer 1

a. Let the break even point for A be X, then

Total Revenue = Total Expense

19*X = 37000 + 9*X

10*X = 37000

X = 3700 Units

Let the break even point for B be Y, then

19*Y = 31000 + 11*Y

8*Y = 31000

Y = 3875 Units

b. Let the point of indifference be Z, then

Total Expense of A = Total Expense of B

37000 + 9*Z = 31000 + 11*Z

2*Z = 6000

Z = 3000

c. If the annual demand is 15000, for A

Profit = Total Revenue - Total Expenses

= 15000*19 - (37000 + 9*15000)

= $113000

Profit for B

= 15000*19 - (31000 + 11*15000)

= $89000

The higher profit will be generated by A