Question

Zan Azlett and Angela Zesiger have joined forces to start A&Z Lettuce Products, a processor of packaged shredded lettuce for institutional use. Zan has years of food processing experience, and Angela has extensive commercial food preparation experience. The process will consist of opening crates of lettuce and then sorting, washing, slicing, preserving, and finally packaging the prepared lettuce. Together, with help from vendors, they think they can adequately estimate demand, fixed costs, revenues, and variable cost per 5-pound bag of lettuce. They think a largely manual process will have monthly fixed costs of $37,500 and variable costs of $1.75 per bag. A more mechanized process will have fixed costs of $75,000 per month with variable costs of $1.25 per 5-pound bag. They expect to sell the shredded lettuce for $2.50 per 5-pound bag.

a) What is the break-even quantity for the manual process? b) What is the revenue at the break-even quantity for the manual process? c) What is the break-even quantity for the mechanized process? d) What is the revenue at the break-even quantity for the mechanized process? e) What is the monthly profit or loss of the manual process if they expect to sell 60,000 bags of lettuce per month? f ) What is the monthly profit or loss of the mechanized process if they expect to sell 60,000 bags of lettuce per month? g) At what quantity would Zan and Angela be indifferent to the process selected? h) Over what range of demand would the manual process be preferred over the mechanized process? Over what range of demand would the mechanized process be preferred over the manual process?

Answer 1

Break-even analysis refers to the technique where the sales volume is identified when the total cost and total revenue is equal. At this point, the company neither makes profit nor loss.