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A product is currently made in a process-focused shop, where fixed costs are $8,000 per year...

A product is currently made in a process-focused shop, where fixed costs are $8,000 per year and variable cost is $40 per unit. The firm currently sells 200 units of the product at $200 per unit. A manager is considering a repetitive focus to lower costs (and lower prices, thus raising demand). The costs of this proposed shop are fixed costs = $24,000 per year and variable cost = $10 per unit. If a price of $80 will allow 400 units to be sold, what profit (or loss) can this proposed new process expect? Do you anticipate that the manager will want to change the process? Explain.

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Expert Solution

Quantity 200 400
Old New
Sales 40000 32000
Less: Variable costs 8000 4000
Contribution 32000 28000
Less: Fixed Costs 8000 24000
Profit 24000 4000

Sales = Selling price x Quantity sold

Variable cost = Quantity Sold x Variable cost per unit.

So, as we can find, the new process will result in a fall in profits. So, it is not recommended.

Amanda K answered 2 years ago
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