Question

Tasty Snacks, Inc., a regional snack foods company (corn chips, potato chips, etc.) in the northeast, is considering two alternative proposals for expansion into southeastern states. Alternative 1: Construct a single plant in Chattanooga, Tennessee with a monthly production capacity of 250,000 cases, a monthly fixed cost of $265,000, and a variable cost of $45 per case. Alternative 2: Construct three plants, one each in Birmingham, Alabama, Tallahassee, Florida, and Charlotte, North Carolina, with capacities of 100,000, 80,000 and 70,000, respectively, and monthly fixed costs of $180,000, $150,000, and $135,000 each. Variable costs would be only $44 per case because of lower distribution costs. To achieve these cost savings, sales from each smaller plant would be limited to demand within its home state. The total estimated monthly sales volume of 175,000 cases in these three southeastern states is distributed as follows: 70,000 cases in Florida, 60,000 cases in North Carolina, and 45,000 cases in Alabama.

A.   Assuming a wholesale price of $50 per case, calculate the breakeven output quantities for each alternative.
  
B.   At a wholesale price of $50 per case in all states, and assuming sales at the projected levels, which alternative expansion scheme provides Tasty Snacks with the highest profit per month?
  
C.   If sales increase to production capacities, which alternative would prove to be more profitable?

Answer 1

Answer A

Alternative 1:

Monthly Production Capacity: 250000 cases

Monthly Fixed Cost- $265000

Variable Cost- $45

Wholesale Price- $50

If breakeven quantity per month is x

Revenue = Price * Quantity = 50 * x = $50x

Total Variable Cost = Variable cost * no. of units = 45 * x = $45x

Total Fixed Cost = $265000

Total Cost = Fixed Cost + Variable cost = 265000+45x

At breakeven Revenue = Total Cost

or, 50x = 265000+45x

or 50x-45x = 265000

or, 5x = 265000

or, x = 265000/5

or, x = 53000

Hence Breakeven quantity of Alternative 1 is 53000 cases

Alternative 2:

Sum of Monthly Production Capacity= 10000+80000+70000 = 250000

Sum of Monthly Fixed Cost- 180000+150000+135000= 465000

Variable Cost- $44

Wholesale Price- $50

If breakeven quantity per month is x

Revenue = Price * Quantity = 50 * x = $50x

Total Variable Cost = Variable cost * no. of units = 44 * x = $44x

Total Fixed Cost = $465000

Total Cost = Fixed Cost + Variable cost = 465000+45x

At breakeven Revenue = Total Cost

or, 50x = 465000+44x

or 50x-44x = 465000

or, 6x = 465000

or, x = 465000/6

or, x = 77500

Hence Breakeven quantity of Alternative 2 is 77500 cases

Answer B

Total Expected Sales volume 175000 cases with Wholesale price $50

Alternative 1

Revenue = 50*175000 = $8750000

Total Cost = 265000 + 45* 175000 = 265000+7875000=$8140000

Profit = Revenue - Total Cost = 8750000-8140000=$610000

Alternative 2

Revenue = 50*175000 = $8750000

Total Cost = 465000 + 44* 175000 = 465000+7700000=$8165000

Profit = Revenue - Total Cost = 8750000-8165000=$585000

Since Profit is higher in case of Alternative 1 it gives the highest profit

Answer C

Alternative 1

Sales = production capacity = 250000

Revenue = 50* 250000 = 12500000

Total Cost =265000 + 45* 250000 = 265000+ 11250000 = $11515000

Profit = Revenue-cost = 12500000-11515000 = $985000

Alternative 2

Sales = production capacity = 250000

Revenue = 50* 250000 = 12500000

Total Cost =465000 + 44* 250000 = 465000+ 11000000 = $11465000

Profit = Revenue-cost = 12500000-11465000 = $1035000

Since Profit is higher in case of Alternative 2, it gives the highest profit