B why is dl fixed and not 719unit as given c sunk why

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(b) Why is DL fixed and not $7.19/unit (as given)? (c) Sunk. Why include it?
TenAlpina: Entrepreneur’s Dilemma Break-even Analysis
a) Estimating Utility Cost (FC/VC): Best method, absent better info, is regression of historical cost data. Here, we have two points and can use “Hi- Lo Method” (compute slope as VC/unit and then back into FC) $1,908 for 1,000 pitons $1,962 for 1,300 pitons VC/unit: ($1,962 – 1,908) / (1,300 – 1,000) = $0.18/unit FC: $1,962 – ($0.18 x 1,300) = $1,728/mo. (x 12) TenAlpina: Entrepreneur’s Dilemma Break-even Analysis Alternative Strategy: Operate Forge Production Model Follow-up Questions : (a) Where does Utility cost come from? (b) Why is DL fixed and not $7.19/unit (as given)? (c) Sunk. Why include it?
TenAlpina: Entrepreneur’s Dilemma Break-even Analysis
b) Why is DL treated as a fixed cost? DL is treated by decision-maker as a fixed cost over the relevant range for the break-even calc, so more realistic in this context for break-even. Also, fixed for term of contract. If we treat DL as variable in this case, we get about the same answer because break-even qty is similar to planned quantity. c) Why include sunk depreciation? Value depletion must be “charged” to units produced for P/L. Replacement of asset is “funded” by current CM. TenAlpina: Entrepreneur’s Dilemma Break-even Analysis Alternative Strategy: Operate Forge Production Model Follow-up Questions : (a) Where does Utility cost come from? (b) Why is DL fixed and not $7.19/unit (as given)? (c) Sunk. Why include it?
TenAlpina: Entrepreneur’s Dilemma Break-even Analysis
Safety Margin? Ch 7: Budgeted Sales – Breakeven Sales (48,000 – 47,979) x $10.50 = $220.50 % Approach (not in text) (48,000 – 47,979) / 48,000 = ~0.05% Risky! TenAlpina: Entrepreneur’s Dilemma Break-even Analysis Alternative Strategy: Operate Forge Production Model
TenAlpina: Entrepreneur’s Dilemma Projected Profit Alternative Strategy: Operate Forge (4k units/mo) Current Strategy (Outsourcing-2Yr Contract) How should we think about the potential for 10% added unit sales? Pure CM!! Potential increase in PT Inc = 4,800 units x $8.76 = $42,048 more Outsource Model Production Model
Q3: Is break-even useful?

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