Question

Q4. Sales of Internet of Tea Makers have boomed. So much so that our company now operates two construction plants, one in Australia (plant I), and one overseas (Plant II). Plant I can produce 200,000 Internet of Tea Makers a year, whereas Plant II can produce 600,000 Internet of Tea Makers a year. The annual fixed cost of Plant I is $150,000 per year and the variable cost is $85 per IoT maker. The annual fixed cost of Plant II is $250,000 per year and the variable cost is $45. Plant 1 is being operated at 85% of capacity and Plant 11 is being operated at 60% of capacity i) What would be the total cost to the company and cost per Internet of Tea Maker if Plant I was operated at full capacity with any remaining demand being satisfied by Plant II? ii) If the total demand for Internet of Tea Makers increased to 700,000 per year, what is the optimum capacity at which Plants I and II should be operated (i.e. to minimise production costs).

Answer 1

schedule plant plant I Total Notes production capacit 200000600000 variable cost per unit B annual total fixed cost 85 45 150000 250000 60% operating capacit current demand answer 1 new demand total variable cost annual total fixed cost Total cost 85% D=AxBl 1700001 3600001 530000 For operating plant A at full capacity unutilized capacity of plant I (30000units) will be satisfied by plant Il, that means 200000 330000 17000000 14850000 150000 250000 17150000 15100000 32250000lcurrent demand of plant II Will decrease answer 2 as variable cost per unit is less for plant II. It 100000600000 700000 will operate at fulll capacit optimum capacit