Question

In: Economics

Company A is considering replacing its current production line. The current line has fixed cost 350,000...

Company A is considering replacing its current production line. The current line has fixed cost 350,000 per year, has variable cost 10 per unit and sells for 14 per unit.

The new production line will have fixed cost of 500,000, variable cost of 9.6 per unit and sells for 16 per unit.

1. Determine the breakeven quantities for both lines.

2. Plot the two profit relations.

3. Determine the breakeven quantity between the two alternatives.

Must be completed in Microsoft Excel

Solutions

Expert Solution

Break even formula: (SP-VC) x no. of units = Fixed Cost

  1. Substituting value for Existing production line:
    • (14-10) x no. of units = 350000
    • no. of units = 87500
  2. Substituting value for proposed production line:
    • (16-9.6) x no. of units = 500000
    • no. of units = 78125

Now having known this we formulate a data table for both the alternatives and then plot the profit curves on a graph:

Existing
Units SP Sales= SP x units VC per unit VC=VC per unit x units FC Profit = Sales-VC-FC
117500 14 1645000 10 1175000 350000 120000
110000 14 1540000 10 1100000 350000 90000
102500 14 1435000 10 1025000 350000 60000
95000 14 1330000 10 950000 350000 30000
87500 14 1225000 10 875000 350000 0
80000 14 1120000 10 800000 350000 -30000
72500 14 1015000 10 725000 350000 -60000
65000 14 910000 10 650000 350000 -90000
57500 14 805000 10 575000 350000 -120000

Proposed
Units SP Sales VC per unit VC FC Profit
108125 16 1730000 9.6 1038000 500000 192000
100625 16 1610000 9.6 966000 500000 144000
93125 16 1490000 9.6 894000 500000 96000
85625 16 1370000 9.6 822000 500000 48000
78125 16 1250000 9.6 750000 500000 0
70625 16 1130000 9.6 678000 500000 -48000
63125 16 1010000 9.6 606000 500000 -96000
55625 16 890000 9.6 534000 500000 -144000
48125 16 770000 9.6 462000 500000 -192000

Rahul Sunny answered 1 year ago
Next > < Previous

Related Solutions

Central Food Inc., is considering replacing its current production line to improve efficiency. The new production...
Central Food Inc., is considering replacing its current production line to improve efficiency. The new production line will cost $650,000 plus $50,000 for shipping and installation. The current production line has a book value of $0 and an estimated market value of $119,666.67. CF uses straight-line depreciation method and has a marginal tax rate of 25% for net income and capital gain. CF’s current annual sales is $433,000 and by estimation, the new production line can increase CF’s annual sales...
Central Food Inc., is considering replacing its current production line to improve efficiency. The new production...
Central Food Inc., is considering replacing its current production line to improve efficiency. The new production line will cost $650,000 plus $50,000 for shipping and installation. The current production line has a book value of $0 and an estimated market value of $119,666.67. CF uses straight-line depreciation method and has a marginal tax rate of 25% for net income and capital gain. CF’s current annual sales is $433,000 and by estimation, the new production line can increase CF’s annual sales...
Central Food Inc., is considering replacing its current production line to improve efficiency. The new production...
Central Food Inc., is considering replacing its current production line to improve efficiency. The new production line will cost $650,000 plus $50,000 for shipping and installation. The current production line has a book value of $74,000 and an estimated market value of $95,000. CF uses straight-line depreciation method and has a marginal tax rate of 25% for net income and capital gain. CF’s current annual sales is $433,000 and by estimation, the new production line can increase CF’s annual sales...
Central Food Inc., is considering replacing its current production line to improve efficiency. The new production...
Central Food Inc., is considering replacing its current production line to improve efficiency. The new production line will cost $650,000 plus $50,000 for shipping and installation. The current production line has a book value of $74,000 and an estimated market value of $95,000. CF uses straight-line depreciation method and has a marginal tax rate of 25% for net income and capital gain. CF’s current annual sales is $433,000 and by estimation, the new production line can increase CF’s annual sales...
Bronson manufacturing is considering replacing an existing production line with a new line that has a...
Bronson manufacturing is considering replacing an existing production line with a new line that has a greater output capacity and operates with less labor than the existing line. The new line would cost $1 million, have a five-year life, and be depreciated using straight line method. At the end of five years, the new line would be sold as scrap for $200,000 (in year 5 dollars). Because the new line is more automated, it would require fewer operators, resulting in...
ACME manufacturing is considering replacing an existing production line with a new line that has a...
ACME manufacturing is considering replacing an existing production line with a new line that has a greater output capacity and operates with less labour than the existing line. The new line would cost $1 million, have a 5-year life, and would be depreciated using the straight-line depreciation method over 5 years. At the end of 5 years, the new line could be sold as scrap for $200 000 (in year 5 dollars). Because the new line is more automated, it...
ACME manufacturing is considering replacing an existing production line with a new line that has a...
ACME manufacturing is considering replacing an existing production line with a new line that has a greater output capacity and operates with less labour than the existing line. The new line would cost $1 million, have a 5-year life, and would be depreciated using the straight-line depreciation method over 5 years. At the end of 5 years, the new line could be sold as scrap for $200 000 (in year 5 dollars). Because the new line is more automated, it...
Nathan Co. is considering replacing its production line used for corn? dogs-in-a-cup. The production line will...
Nathan Co. is considering replacing its production line used for corn? dogs-in-a-cup. The production line will generate? $1,300,000 in additional revenue per year for each of the next six years. Incremental annual operating costs are projected at? 60% of sales. The new production line equipment will cost? $1,500,000, and will be depreciated according to MACRS as a? five-year asset. The new fixed assets will have a market value of? $50,000 (before? taxes) at the end of six years. The existing...
(Please show work and equations used) Central Food Inc., is considering replacing its current production line...
(Please show work and equations used) Central Food Inc., is considering replacing its current production line to improve efficiency. The new production line will cost $650,000 plus $50,000 for shipping and installation. The current production line has a book value of $0 and an estimated market value of $119,666.67. CF uses straight-line depreciation method and has a marginal tax rate of 25% for net income and capital gain. CF’s current annual sales is $433,000 and by estimation, the new production...
The Luddite Corporation is considering replacing its southwest production line with a totally new system that...
The Luddite Corporation is considering replacing its southwest production line with a totally new system that will increase production as well as decreasing costs from labor and material waste. The new line will cost $680,000 to have in place ready to go. Luddite expects that it will increase cash flows by $120,500 each year for ten years. At the end of its expected life, the system's salvage value is expected to equal the costs to remove it. The required return...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT