ORIE 451/551
Homework #1
1.
EEA Manufacturing estimates the following costs for various levels of production for
the year.
Production (units)
Total Cost ($)
14,000
$53,400,000
20,000
$57,960,000
26,000
$64,050,000
a)
Find the fixed annual cost and the variable cost per unit.
Using linear regression the best curve fit is given by:
Total Cost = $40,720,000 + 887.50 D
The fixed annual cost is $40,720,000
(5 points)
The variable cost per unit is $887.50
(5 points)
b)
If annual production is 20,000 units, what selling price per unit would be needed to
break even?
Using the estimated cost, we would need revenue of $57,960,000, or $2,898 per unit.
Using the curve fit, we would need
F
V
C
40,720,000
p
C
887.50
$2,923.50
D'
20,000
=
+
=
+
=
Either answer is acceptable
(10 points)
2.
Snakisco Inc. is looking to buy a new machine from a supplier for their manufacturing
facility.
Determine the ranges of annual production under which each machine
would be preferred.
Machine’s Supplier
Annual Fixed Cost
Variable Cost per Unit
Adapco Enterprises
$100,000
$20
Branson Industries
$200,000
$5
Cobalt Incorporated
$150,000
$7.50
0
≤
D
≤
4,000
Adapco
(20 points)
4,000
≤
D
≤
20,000
Cobalt
20,000
≤
D
Branson