Question

Folding Hinge Sliding Mechanism Design Design Manufacturing Plant Manufacturing Plant Fixed Cost (£) 355,000 855,000 Cost per unit production (E/unit) 230 150 Revenue per unit E/unit) 650 550 Daily production capacity 120 150 (maximum number of units per day assuming no defects) 1) A manufacturer of collapsible bicycles has developed two design options for city commuters. Each design option requires different manufacturing plants because one design option is for a foldable hinge design and the other design option is for a horizontal sliding mechanism design that reduces the bicycle's front-to-back distance Calculate the break-even point for each investment option shown in Table Q2a. Assume that there are zero defects during production and that all the units produced sold post-production 2) The above manufacturer anticipates an annual output of 10,000 units. Determine the profit (or loss) for each manufacturing plant option based on 10,000 units output and the number of days production required. Recommend one design option and give a clear justification

Answer 1

1)

Folding Hinge Design

Total Revenue (TR)= 650 * Total Number of Units produced/sold (X)

TR= 650*X

Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC)

TC = 355000+ 230* Total Number of produced/sold (X)

TC = 355000+230*X

Break even occurs at a point where TR= TC

Therefore,

650*X = 355000+230*X

420*X= 355000

X= 355000/420 = 845 units approx

Similarly for Sliding Mechanism Design

TR= 550*X

TC= 855000+150*X

Break Event points occurs at TR=TC

550*X =855000+150*X

400*X= 855000

X= 855000/400 =2138 units approx

2) Suppose 10000 units are sold then profit in case of folding hinge design will be

Profits = Total Revenue- Total Cost

Profits= 650*X-355000-230*X= 420*X-355000= 420*10000-355000= 4200000-355000= 3845000

Similarly profits in case of sliding mechanism design will be

Profits= 550*X-855000-150*X= 400*X-855000= 400*100000-855000= 4000000-855000= 3145000

Now, in case of folding hinge design, daily production capacity is 120/day or 1 day= 120 units

so 1 unit is produced in 1/120th day. Therefore 10000 units will be produced in (1/120)*10000 days i.e.   83 days approx.

Similarly in case of sliding mechanism design, daily production capacity is 150/day or 1 day= 150 units so 1 unit is produced in 1/150th day. Therefore 10000 units will be produced in 1/150*10000 days i.e. 67 days approx

Folding Hinge Design mechanism will be preferred since firm will be earning more profits in that case.