LS2663: A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two alternatives A and B have been identified, and the associated costs and revenues have been estimated. Annual fixed costs would be Rs. 40,000 for A, and Rs. 30,000 for B, variable costs per unit would be Rs, 10 for A and Rs. 12 for B; and revenue per unite would be Rs. 15 for A and Rs. 16 for B.

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Question: A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two alternatives A and B have been identified, and the associated costs and revenues have been estimated. Annual fixed costs would be Rs. 40,000 for A, and Rs. 30,000 for B, variable costs per unit would be Rs, 10 for A and Rs. 12 for B; and revenue per unite would be Rs. 15 for A and Rs. 16 for B.

(i) Determine the break-even point in terms of units for each alternative.

(ii) At what volume of output would the two alternatives yield the same profit?

(iii) If expected annual demand is 12,000 units, which alternative would yield a higher profit?

 


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