Question

A specialist graphics company is investing in a new machine which enables it to make high quality prints for its clients. Demand for these prints is forecast to be around 50,000 units in year 1 and 80,000 units in year 2. The maximum capacity of each machine the company will buy to process these prints is 60,000 units per year. They have a fixed cost of RM40,000 per year and a variable processing cost of RM0.50 per unit. The company believe they will be able to charge RM2 per unit for producing the prints.

(a) Calculate the total cost for year 1.

(b) What is the total profit for year 1?

(c) Calculate the total cost for year 2.

(d) What is the total profit for year 2?

Answer 1

Fixed cost of each machine (F) = 40,000

Variable cost of each unit (V) = 0.5

Selling price of each unit (SP) = 2

Demand of year 1 (D1) = 50000

Demand of year 2 (D2) = 80000

a) For 1^st year, Demand is 50000 and each machine capacity is 60000. So, single machine will be required

Total cost for year 1 = F*Number of machines + D1*V = 40000*1 + 50000*0.5 = 65000

b) Profit for 1^st year = D1*SP – Total cost for 1^st year = 50000*2 – 65000 = 35000

c) For 2^nd year, Demand is 80000 and each machine capacity is 60000. So, two machines will be required

Total cost for year 2 = F*Number of machines + D2*V = 40000*2 + 50000*0.5 = 105000

d) Profit for 2^nd year = D2*SP – Total cost for 2^nd year = 80000*2 – 105000 = 55000