solution_6 questions - Solution to Question 2 A Breakeven...

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Solution to Question 2 A Breakeven Point (in units) = Fixed Cost / Contribution per unit Breakeven Point (in dollars) = Fixed Cost / PV ratio And, PV ratio = Contribution / Sales Alternative I Alternative II Alternative III New Equipment Outsource Status Quo Selling Price per unit 200.00 200.00 200.00 Less: variable Cost per unit - Direct Material 70.00 160.00 90.00 - Direct Labour 30.00 60.00 Total variable cost per unit 100.00 160.00 150.00 Contribution per unit 100.00 40.00 50.00 PV Ratio 50% 20% 25% Fixed Cost 45,000.00 15,000.00 20,000.00 BEP (in units) 450.00 375.00 400.00 BEP (in dollars) 90,000.00 75,000.00 80,000.00 Solution to Question 2 B Alternative I Alternative II Alternative III New Equipment Outsource Status Quo Sales Revenue 100,000.00 100,000.00 100,000.00 Less: Variable Cost - Direct Material 35,000.00 22,500.00 45,000.00 - Direct Labour 15,000.00 15,000.00 30,000.00 - Purchased 40,000.00 Total Variable Cost 50,000.00 77,500.00 75,000.00 Contribution 50,000.00 22,500.00 25,000.00 Less: Fixed Cost 45,000.00 15,000.00 20,000.00 Net Profit 5,000.00 7,500.00 5,000.00 Solution to Question 2 C On the analysis done above, it is recommended that the Alternative II of outsourcing half of the facility is advisable as it is giving the maximum net profits among the three alternatives. Solution to Question 2 D
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Alternative I Alternative II Alternative III New Equipment Outsource Status Quo Sales Revenue 120,000.00 120,000.00 120,000.00 Less: Variable Cost - Direct Material 42,000.00 27,000.00 54,000.00 - Direct Labour 18,000.00 18,000.00 36,000.00 - Purchased 48,000.00 Total Variable Cost 60,000.00 93,000.00 90,000.00 Contribution 60,000.00 27,000.00 30,000.00 Less: Fixed Cost 45,000.00 15,000.00 20,000.00 Net Profit 15,000.00 12,000.00 10,000.00 In this case, Alternative I is recommended due to the highest profits among the three. Solution to Question 2 E CVP analysis assumes that costs and revenues are linear within a relevant range of activity. Linear total revenues means that selling prices per unit are constant and the sales mix does not change. Offering volume discounts to customers violates this assumption. Linear total costs mean total fixed costs are constant and variable costs per unit are constant. If volume discounts are received from suppliers, then variable costs per unit are not constant. If worker productivity changes as activity levels change, then variable costs per unit are not constant. Linear CVP analysis may be inappropriate if the linearity assumptions hold only over small
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This note was uploaded on 05/13/2010 for the course MECH 17657 taught by Professor Ravikant during the Spring '10 term at Indian Institute of Technology, Delhi.

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solution_6 questions - Solution to Question 2 A Breakeven...

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