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midterm+review+extra+questions+-+discussion+session

# midterm+review+extra+questions+-+discussion+session -...

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Current Upgrade Manufacturing costs: Direct material cost per unit \$20 \$20 Direct labor cost per unit \$18 \$10 Variable overhead cost per unit \$34 \$24 Fixed overhead cost in total \$43,000 \$160,000 Selling and administrative expenses: Variable expense per unit \$5 \$5 Fixed expense in total \$12,000 \$12,000 selling price \$125 \$130 Question: A company sells a single product. They are considering upgrading their current manufacturing facilities. Cost data are presented above. The new facilities will product better products hence higher price. At what level of sales (in terms of units) will the company start being more profitable to upgrade? Answer: 1. Create profit function for current and upgrade scenarios: Note: (Price/unit - VC/unit) * Quantity - FC = Profit Current profit = (125 - 77) * Quantity - 55000 Upgrade profit = (130 - 59) * Quantity - 172000 2. Solve for Quantity Let current profit = upgrade profit 48 * Q - 55000 = 71 * Q - 172000 Q = 5087 Therefore, starting at Q=5087 will the company start being more profitable to upgrade.

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Product C Product D Product E Selling price \$90 \$30 \$60 Variable costs \$30 \$10 \$20 Fixed costs \$40 \$10 \$30
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