Question

JLF and RBF own Up Right Paddlers, a new startup company with the goal of designing, making, and marketing stand-up paddle boards for streams and rivers. A new fitness craze, stand-up paddle boards are similar to surfboards in appearance, but are used by individuals to navigate down rivers in an upright position with a single long pole (or paddle), instead of sitting in tubes or rafts and floating down. The boards are constructed from heavy duty raft material that is inflatable, rather than the fiberglass material used in surfboards. Unlike surfboards that market for Php50,000 to Php100,000 each, paddle boards are typically sold for between Php10,000 and Php40,000. Since JLF and RBF are just starting out and the demand for paddle boards on the Northern Region has not been firmly established, they anticipate selling their product for Php10,000 each. JLF estimates the fixed cost for equipment and space will be Php200,000, and the material and labor costs will run Php 5,000 per unit. What volume of demand will be necessary for JLF and RBF to break even on their new venture?

RBF, the more optimistic of the two owners of Up Right Paddlers, believes that demand for paddle boards will exceed the computed breakeven point. He proposes spending Php1,000,000 in fixed costs to buy more automated equipment that would reduce the materials and labor cost to Php 3,000 per board. The boards would sell for Php10,000, regardless of which manufacturing process is chosen. Compare the two processes and determine for what level of demand each process would be preferred. Label JLF proposal as Process A, and RBF’s proposal as Process B.

Answer 1

	JLK - Process A	RBF -Process B
Fixed cost (Php)	200000	1000000
Variable cost (Php) per unit	5000	3000
Revenue (Php) per unit	10000	10000

Break Even Point (in units) = Fixed cost/ (Revenue per unit - Variable cost per unit)

	JLK - Process A	RBF -Process B
Break Even Point (in units) =	40	143

Total Cost = Fixed cost + (No. of units*Variable cost)

Based on the formula of total cost below is the preferred level of production for both the processes:

Units	Total Cost Process A	Total Cost Process B	Least cost Preferred Process
20	300000	1060000	Process A
30	350000	1090000	Process A
40	400000	1120000	Process A
100	700000	1300000	Process A
143	915000	1429000	Process A
200	1200000	1600000	Process A
250	1450000	1750000	Process A
300	1700000	1900000	Process A
350	1950000	2050000	Process A
399	2195000	2197000	Process A
400	2200000	2200000	Indifferent
401	2205000	2203000	Process B
450	2450000	2350000	Process B
500	2700000	2500000	Process B

As seen in the above table, Process A is preferred upto the production of 399 units (as its cost will be lesser compared to process B)

At 400 units, both processes have same total cost, so they are indifferent.

For units more than 400, Process B is preferred (as its cost will be lesser compared to process A)