A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two, alternatives, A and B have been identified and the associated costs and revenues have been estimated. Annual fixed costs, would be Rs. 84,00,000 for A and Rs. 60,00,000 for B ; variable costs per unit would be Rs. 120 for A and Rs. 150 for B; and revenue per unit would be Rs. 180 for A and Rs. 200 for B.
i) Determine each alternative’s break-even point in unit
ii) At what volume of output would the two alternatives yield the same profit?
iii) If expected annual demand is 300000 units, which alternative would yield the higher profit?
Solution.
(i) Break even point = fixed cost/contribution per unit
Alternative:
A= 8400000 / (180 - 120) = 140000 units
B= 6000000 / (200 - 150) = 120000 units
(ii) Let the level at which the two alternative yield same profit is ‘X’
Profit:
A = X * 60 - 84,00,000
B = X * 50 - 60,00,000
60X - 84,00,000 = 50X - 60,00,000
10X = 24,00,000
X = 24,00,000/10
X = 2,40,000 units
(iii) Profit when demand is 3,00,000 units
A = 3,00,000 x 60 - 84,00,000 = 96,00,000
B = 3,00,000 x 50 - 60,00,000 = 90,00,000
A yields higher profit
i) Determine each alternative’s break-even point in unit
ii) At what volume of output would the two alternatives yield the same profit?
iii) If expected annual demand is 300000 units, which alternative would yield the higher profit?
Solution.
(i) Break even point = fixed cost/contribution per unit
Alternative:
A= 8400000 / (180 - 120) = 140000 units
B= 6000000 / (200 - 150) = 120000 units
(ii) Let the level at which the two alternative yield same profit is ‘X’
Profit:
A = X * 60 - 84,00,000
B = X * 50 - 60,00,000
60X - 84,00,000 = 50X - 60,00,000
10X = 24,00,000
X = 24,00,000/10
X = 2,40,000 units
(iii) Profit when demand is 3,00,000 units
A = 3,00,000 x 60 - 84,00,000 = 96,00,000
B = 3,00,000 x 50 - 60,00,000 = 90,00,000
A yields higher profit
