Question

Kelly Kneppy owns a company that manufactures and sells camping equipment and outdoor

gear. Kelly’s latest creation is the Bear-B-Gone, a tent constructed of Kevlar and reinforced steel

mesh that could theoretically protect campers (who hadn’t followed appropriate food storage

guidelines) from bear attacks. Kelly believes the Bear-B-Gone offers many of the same desirable

features as other tents on the market, and that this extreme safety feature will make it one of the

best-selling tents in short order.

Kelly can make the Bear-B-Gone with one of two available technologies. The first is a labor-

intensive process, that if chosen will require $600,000 per year in fixed overhead costs, and the

following in variable costs of production per unit: direct materials of $75, direct labor of $75,

and overhead of $20. The second technology is a more automated (machine-dependent) process,

that if chosen will require $2,000,000 per year in fixed overhead costs, and the following in

variable costs of production: direct materials of $75, direct labor of $5, and overhead of $60.

Kelly believes she can sell the tent for $200.

3) Suppose possible sales are expected to range between 40,000 and 60,000 units as noted

above, and that production will equal sales (no beginning/ending inventory). Which

process has the greater

range

in profit? Why might this be a factor for Kelly to consider

in making her decision?

Answer 1

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Kelly Kneppy	For labor intensive			For machine intensive
Particulars	40000 units	60000 units		Particulars	40000 units	60000 units
Sell Price	200.00	200.00		Sell Price	200.00	200.00
Direct Materials	75.00	75.00		Direct Materials	75.00	75.00
Direct Labor	75.00	75.00		Direct Labor	5.00	5.00
Variable Overhead	20.00	20.00		Variable Overhead	60.00	60.00
Contribution margin	30.00	30.00		Contribution margin	60.00	60.00
Contribution amount	1,200,000.00	1,800,000.00		Contribution amount	2,400,000.00	3,600,000.00
Fixed overhead costs	600,000.00	600,000.00		Fixed overhead costs	2,000,000.00	2,000,000.00
Net Profit	600,000.00	1,200,000.00		Net Profit	400,000.00	1,600,000.00
				So machine intensive process has the greater range in profit.
Why might this be factor for Kelly to consider in making her decision?
This might be a factor because starting units give low net profit under machine intensive than labor intensive. So if sales go down it will impact profit drastically.