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Written Assignment #5 - Dustin Taylor FIN-301 June 2011...

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Dustin Taylor FIN-301 June 2011 Term Written Assignment #5 Chapter 19 Problem #2 a. Scale of operation #1 4Q = 3,000 + 2.8Q 1.2Q = 3,000 Q = 2,500 Scale of operation #2 4Q = 5,000 + 2.4Q 1.6Q = 5,000 Q = 3,125 b. Scale of operation #1 Sales - $4 x 5,000 = $20,000 Costs - $3,000 + $2.8(5,000) = $17,000 Profit = $3,000 Scale of operation #2 Sales - $4 x 5,000 = $20,000 Costs - $5,000 + $2.4(5,000) = $17,000 Profit = $3,000 c. Scale of operation #1 Cash receipts - $8,000 Cash expenses - $7,100 Yes. Cash receipts will cover cash expenses. Scale of operation #2 Cash receipts - $8,000 Cash expenses - $7,300 Yes. Cash receipts will cover cash expenses. d. Scale of operation #1 Year Unit Sales Sales in $ Expenses in $ Profit 1 4,000 $16,000 $14,200 $1,800 2 5,000 $20,000 $17,000 $3,000 3 6,000 $24,000 $19,800 $4,200 4 7,000 $28,000 $22,600 $5,400
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Scale of operation #2 Year Unit Sales Sales in $ Expenses in $ Profit 1 4,000 $16,000 $14,600 $1,400 2 5,000 $20,000 $17,000 $3,000 3 6,000 $24,000 $19,400 $4,600 4 7,000 $28,000 $21,800 $6,200 Management can justify selecting scale of operation #2 because it is more profitable over the 5 year span. If sales only peaked at 5,000, they should stick with scale of operation #1. Anything over 5,000 and scale of operation #2 is the way to go.
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