# Capacity Decision

July 4, 2017 General Studies

(a) A firm produces three products. Product A sells for \$60; its variable costs are \$20. Product B sells for \$200; its variable costs are \$120. Product C sells for \$25; its variable costs are \$10. Last year, the firm sold 1000 units of A, 2000 units of B, and 10,000 units of C. The firm has fixed costs of \$320,000 per year. Calculate the break-even point of the firm. Selling Variable price cost (P) (V) \$60 \$20 \$200 \$120 \$25 \$10 TOTAL ASSIGNMENT NO. 2 Product A B C V/P 0. 33 0. 60 0. 40 1V/P 0. 7 0. 40 0. 60 Sale \$60,000 \$400,000 \$250,000 \$710,000 ! Percentage Weighted of sales contribution 0. 0845 0. 5634 0. 3521 1. 0000 0. 0567 0. 225 0. 211 0. 4927 Break-even (\$) = !  [ !! !” ! ” !” ] = = \$”#\$,!!! !.! “#\$ \$649,482. 44 (b) A firm is about to undertake the manufacture of a product, and is weighing three capacity alternatives: small job shop, large job shop, and repetitive manufacturing. The small job shop has fixed costs of \$3,000 per month, and variable costs of \$10 per unit.

The larger job shop has fixed costs of \$12,000 per month and variable costs of \$3 per unit. The repetitive manufacturing plant has fixed costs of \$30,000 and variable costs of \$1 per unit. Demand for the product is expected to be 1,000 units per month with “moderate” market acceptance, but 2,000 under “strong” market acceptance. The probability of moderate acceptance is estimated to be 60 percent; strong acceptance has a probability of 40 percent. The product will sell for \$25 per unit regardless of the capacity decision.

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Which capacity choice should the firm make? 18 ,00 0 p o str 0. 4 ng TR FC VC TC Profit \$ 50,000 (\$25 X 2000) \$ 3,000 \$ 20,000 (\$10 X 2000) \$ 23,000 \$ 27,000 0. 6 mo der ate TR FC VC TC Profit \$ 25,000 (\$25 X 1000) \$ 3,000 \$ 10,000 (\$10 X 1000) \$ 13,000 \$ 12,000 =\$ EM V Sm all s ho o str EMV = \$ 18,800 Large shop 0. 4 0. 6 m ng TR FC VC TC Profit \$ 50,000 (\$25 X 2000) \$ 12,000 \$ 6,000 (\$3 X 2000) \$ 18,000 \$ 32,000 od era t e TR FC VC TC Profit \$ 25,000 (\$25 X 1000) \$ 12,000 \$ 3,000 (\$3 X 1000) \$ 15,000 \$ 10,000 titi pe Re

EM 00 3,6 ring = \$ actu f V nu ma ve o str 0. 4 ng TR FC VC TC Profit \$ 50,000 (\$25 X 2000) \$ 30,000 \$ 2,000 (\$1 X 2000) \$ 32,000 \$ 18,000 0. 6 mo de rat e TR FC VC TC Profit \$ 25,000 (\$25 X 1000) \$ 30,000 \$ 1,000 (\$3 X 2000) \$ 31,000 – \$ 6,000 (i) (ii) (iii) EMV (small shop) EMV (large shop) EMV (repetitive) = (0. 40) (\$27,000) + (0. 60) (\$12,000) = \$18,000 = (0. 40) (\$32,000) + (0. 60) (\$10,000) = \$18,800 = (0. 40) (\$18,000) + (0. 60) (- \$6,000) = \$3,600 Therefore, the firm should choose the capacity of large shop

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