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. (8 pts)

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

b.  Find the break-even quantity for each option (4 pts)

c.  Graph the Total profit for each option vs Quantity (both lines on one graph) Show Quantity from 0 to 50,000 (10 pts)

d.  Write an interpretation of your graph (8 pts)

Answer 1

a. Case 1: where VC = 0.5Q; FC = 11,000.

Break even quantity = 11,000 (highlighted), where TR = TC = 16,500

Case 2: VC = 0.75Q; FC = 4000

Brek evenquantity = 5,400 highlighted) where TR= TC = 8,100

c) Graph:

d) Both options have been presented in a table (separately) and in a graph (common for both). Break even point for case 1(FC = 11,000) is where quantity = 11,000; while for case 2 (FC=4,000) break even point is at quantity = 5400; where TR=TC. Overall, at output level = 28,000, profits for both cases is the same (17,000). Firm will be indifferent which case it chooses if output = 28,000.