Question

MGMT 335 HW#2

1. Determine the utilization and the efficiency for the following situation:

(a) A loan processing operation that processes an average of 10 loans per day. The operation has a design capacity of 16 loans per day and an effective capacity of 12 loans per day.

[Hint: Please read Example 1 on page 189 in the text book.]

Please solve the following problem related to cost-volume analysis

2. A producer of pens has fixed costs of $12,000 per month which are allocated to the operation and variable costs are $1.80 per pen.

(a) Find the break-even quantity if pens sell at $2.4 each.

(b) Find the profit if the company produces 25,000 pens and pens sell at $2.4 each?

[Hint: Please read Example 3 on page 203-204 and Problems 2-3 on page 209.]  

3. A firm plans to begin production of a new small appliance. The manager must decide whether to purchase the motor for the appliance from a vendor at eight dollars each or to produce them in-house. The in-house process would have an annual fixed cost of $160,000 and a variable cost of six dollars per unit. Determine the range of annual volume for which each of the alternatives would be best.

[Hint: Please read Problem 1 on page 208 in the text book.]

Answer 1

1.Given, actual output = 10 loan per day, design capacity= 16 loans per day, effective capacity= 12 loan/day

Utilization = Actual output/ design capacity = 10/16 = 62.5%

Efficiency = Actual output / Effective capacity = 10/12 = 83.33%

2. Given, fixed cost = 12,000 per month, variable cost, v = 1.80 per pen, Revenue, R= $2.4 per pen

a. Break even quantity, Q_BEP =FC/(R-v) = 12000/ (2.4-1.8) = 20,000

b. Quantity produced, Q= 25,000, R =$2.4

Profit, P = Q(R-v) - FC = 25000(2.4-1.8)-12,000 = $3000

3. Given annual fixed cost= $160,000, variable cost = $6 per unit when producing in in-house

Variable cost = $8 per motor while buying from outside

When making, Total cost = fixed cost + (volume x variable cost)

                      = 160,000 + (Qx6)

When buying, total cost = 0 + (Q x 8) =8Q

When total cost for both making and buying becomes equal, both choices would be equivalent.

160,000+ 6Q = 8Q

160,000 = 8Q-6Q = 2Q

Q= 160,000/2 = 80,000 units

Therefore when the volume is less than 80,000 units per year, buying would be best and for volumes higher than 80,000 units per year, making in house would be the best alternative.