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# krm8_ism_a - Supplement A Decision Making PROBLEMS 1...

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Supplement A Decision Making PROBLEMS 1. Williams Products a. Break-even quantity Q ( 29 = - ( 29 = - ( 29 = Fixed costs Unit price Unit variable costs units \$60, \$18 \$6 , 000 5 000 The graphic approach is shown on the following illustration, using Break-Even Analysis Solver of OM Explorer. —Costs - -Revenues Break-even quantity (10,000, 180,000) (10,000, 120,000) \$0 \$20,000 \$40,000 \$60,000 \$80,000 \$100,000 \$120,000 \$140,000 \$160,000 \$180,000 \$200,000 0 2000 4000 6000 8000 10000 12000 Quantity (Q) Two lines must be drawn: Revenue: Total cost: = = + 18 60 000 6 Q Q , b. Profit Revenue Total cost = - = - + ( 29 = ( 29 - + ( 29 = - = pQ F cQ \$14. , \$60, \$6 , \$140, \$120, \$20, 00 10 000 000 10 000 000 000 000 c. Profit Revenue Total cost = - = - + ( 29 = ( 29 - + ( 29 = - = pQ F cQ \$12. , \$60, \$6 , \$187, \$150, \$37, 50 15 000 000 15 000 500 000 500

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l PART 1 l Using Operations to Compete Therefore, the strategy of using a price of \$12.50 will result in a greater contribution to profits. d. Williams must also consider how this product fits within her existing product line from the perspective of required technologies and distribution channels. Other marketing, operations, and financial criteria must also be considered. 2. Jennings Company a. Break-even quantity ( 29 ( 29 ( 29 Fixed costs Unit price Unit variable costs \$80,000 \$22 \$18 20,000 units Q = - = - = The graphic approach is shown on the following graph created by the Break- Even Analysis Solver. —Costs - -Revenues Break-even quantity (40,000, 880,000) (40,000, 800,000) \$0 \$100,000 \$200,000 \$300,000 \$400,000 \$500,000 \$600,000 \$700,000 \$800,000 \$900,000 \$1,000,000 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 Quantity (Q) Two lines are: Revenue: Total cost: = = + \$22 \$80, Q Q 000 18 b. Alternative 1: Sales increase by 30 percent, to 22,750 units. Profit = - + ( 29 = ( 29 - + ( 29 = pQ F cQ \$22 , \$80, \$18 , \$11, 22 750 000 22 750 000 12
Decision Making l SUPPLEMENT A l Alternative 2: Cost reduction to 85 percent results in \$15.30 unit cost. Profit = - + ( 29 = ( 29 - + ( 29 = pQ F cQ \$22 , \$80, \$15. , \$37, 17 500 000 30 17 500 250 Therefore the cost reduction leads to higher profits in this example. c. Initial unit profit is \$22 \$18 \$4. - ( 29 = 00 Alternative 1: \$22 \$18 \$4. - ( 29 = 00 The percentage change in profit margin is zero. Alternative 2: \$22 \$15. \$6. - ( 29 = 30 70 The percentage change is \$6. \$4 \$4 . 70 67 5 - ( 29 = percent increase. 3. Interactive television service F p c Q = - ( 29 = - ( 29 = \$15 \$10 , \$75, 15 000 000 4. Brook Trout ( 29 ( 29 \$10,600 800 \$6.70 \$19.95 Q F p c p F Q c = - = + = + = 5. Gabriel Manufacturing a. ( 29 ( 29 Total cost Fixed cost Variable cost first process \$300,000 \$600 second process \$120,000 \$900 TC F cQ TC Q TC Q = + = + = + = + At the break-even quantity, \$300, \$600 \$120, \$900 \$300 \$180, 000 000 000 600 + = + = = Q Q Q Q units Beyond 600 units the first process becomes more attractive. b. At Q = 800 units ( 29 ( 29 ( 29 ( 29 first process \$300,000 \$600 800 \$780,000 second process \$120,000 \$900 800 \$840,000 The difference in total cost \$840,000 \$780,000 \$60,000 TC TC = + = = + = = - = 13

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l PART 1 l Using Operations to Compete 6. News clipping service a. Q F F c c m a a m = - - = - - = \$400, \$1, , \$2. \$6. , 000 300 000 25 20 227 848 clippings b. Profit Total Revenue Total Cost = - Current (manual) situation: = × ( 29 - + × ( 29 225 000 00 000 225 000 20 , \$8. \$400, , \$6.
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