Question

Bismarck Manufacturing intends to increase capacity through the addition of new equipment. Two vendors have presented proposals. The fixed cost for proposal A is $65,000, and for proposal B, $34,000. The variable cost for A is $10, and for B, $14. The revenue generated by each unit is $18. (a) What is the break-even point for each proposal? (b) If the expected volume is 8,300 units, which alternative should be chosen?

pic two is the (a) answer, not sure if it is correct? plz correct (a) and do (b) use excel or write down clearly. Thanks

Answer 1

(a)

Proposal A

Fixed cost = $65,000

Variable cost per unit = $10

Revenue per unit = $18

Breakeven point = $65,000 / ($18 - $10) = 8,125 units

Total revenue = $146,250 (8,125 X $18)

Fixed cost = $65,000

Total variable cost = $81,250 (8,125 X $10)

Total cost = $146,250 ($65,000 + $81,250)

Profit = $0 (Total revenue - Total cost = $146,250 - $146,250)

Proposal B

Fixed cost = $34,000

Variable cost per unit = $14

Revenue per unit = $18

Breakeven point = $34,000 / ($18 - $14) = 8,500 units

Total revenue = $153,000 (8,500 X $18)

Fixed cost = $34,000

Total variable cost = $119,000 (8,500 X $14)

Total cost = $153,000 ($34,000 + $119,000)

Profit = $0 (Total revenue - Total cost = $153,000 - $153,000)

(b)

Profit or (loss) = [(Selling price - Variable cost) X Units sold] - Fixed cost

Proposal A = [($18 - $10) X 8,300] - $65,000 = $1,400

Proposal B = [($18 - $14) X 8,300] - $34,000 = ($800)

Proposal A should be chosen because there is profit in Proposal A and loss in Proposal B.