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Stapleton Manufacturing intends to increase capacity through the addition of new equipment. Two vendors have presented...

Stapleton Manufacturing intends to increase capacity through the addition of new equipment. Two vendors have presented proposals. The fixed cost for proposal A is $65,000, and for proposal B, $34,000. The variable cost for A is $10, and for B, $14. The revenue generated by each unit is $18.

  1. What is the crossover point in units for the two options?
  2. At an expected volume of 8,300 units, which alterative should be chosen?
  3. What is the range of units for which proposal A is preferable?
  4. What is the range of units for which proposal B is preferable?
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Homework Answers

Answer #1

(a) profits from A = price*quantoto - total cost

= 18Q - 10Q - 65000

= 8Q - 65000

profits from B = 18Q - 14Q - 34000 = 4Q - 34000

crossover point si when profits are same for both

=>8Q - 65000 = 4Q - 34000

=> 4Q = 31000

=> Q = 31000/4 = 7750

(b) when Q = 8300,

profit from A = 8*8300 - 65000 = 1400

profit from B = 4*8300 - 34000 = -800

Since profits from A is higher, it should be used

(c) A is preferable when, 4Q - 34000 > 8Q - 65000

=> 4Q < 31000

=> Q < 7750

(d) B is preferable when, 8Q - 65000 > 4Q - 34000

=> Q > 7750

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