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Tom Johnson Manufacturing intends to increase capacity through the addition of new equipment. Two vendors have...

Tom Johnson Manufacturing intends to increase capacity through the addition of new equipment. Two vendors have presented proposals. The fixed costs for proposal A are​ $50,000, and for proposal​ B, $70,000. The variable cost for A is​ $12.00, and for​ B, $10.00. The revenue generated by each unit is​ $20.00.

​a) If the expected volume is​ 8,500 units, _______(proposal A or proposal B) with a total profit = $______ should be chosen ​(enter your response as a whole​ number).

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Expert Solution

For proposal A

Total Fixed cost = $50000

Total Variable cost =variable cost per unit X number of units produced = $12X8500 units = $102000

So,Total cost for proposal A = Total fixed cost + total variable cost = $50000 + $102000 = $152000

Total revenue for proposal A = Revenue per unit X number of units produced = $20 X 8500 units = $170000

Therefore,Total Profit for proposal A = Total revenue - Total cost = $170000 - $152000 = $18000

For proposal B

Total fixed cost = $70000

Total variable cost = Variable cost per unit X number of units produced = $10 X 8500 units = $85000

So,Total cost for proposal B = Total fixed cost + Total variable cost = $70000 + $85000 = $155000

Total revenue for proposal B = Revenue per unit X number of units produced = $20 X 8500 units = $170000

Therefore Total profit for proposal B = Total revenue - Total cost = $170000 - $155000 = $15000

Since the total profit for proposal A is higher than the total profit for proposal B,Proposal A should be choosen if the expected volume is 8500 units.

Therefore,the final answer is :

If the expected volume is 8500 units,proposal A with a Total profit = $18000 should be choosen.

Amanda K answered 2 years ago
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