Question

The operations manager for an auto supply company is evaluating the potential purchase of a new machine for the production of a transmission component.   Current manufacturing costs are fixed costs of $11,000 and a variable cost of $0.50 per unit. The new machine would have fixed cost of $4,000 and a variable cost of $0.75 per unit. Each component is sold for $1.50 per unit.

a. Develop two separate models in your spreadsheet to calculate Total Profit for each option.

            The models must be flexible and able to calculate Total profit for any Quantity produced.

b. Find the break-even quantity for each option

c. Graph the Total profit for each option vs Quantity (both lines on one graph) Show Quantity from 0 to 50,000

d. Write an interpretation of your graph

Answer 1

a.

This is extended up to Q = 50,000

b.

	Current	New
Selling price	$1.50	$1.50
Unit variable cost	$0.50	$0.75
Fixed cost	$11,000	$4,000
Brek-even qty	11,000	5,334

c.

d.

Below Q=28,000, the blue line gives the lower cost, so, up to a volume of 28,000, the current process is most economical. The new process will be more economical only when the volume goes beyond 28,000