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Manufactureer Demand

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Submitted By jsysantiago
Words 354
Pages 2
1. (P1-21) A manufacturer is evaluating options regarding his production equipment. He is trying to decide whether he should refurbish his old equipment for $70,000, make major modifications to the production line for $135,000, or purchase new equipment for $230,000. The product sells for $10, but the variable costs to make the product are expected to vary widely, depending on the decision that is to be made regarding the equipment. If the manufacturer refurbishes, the variable costs will be $7.20 per unit. If he modifies or purchases new equipment, the variable costs are expected to be $5.25 and $4.75, respectively.
(a) Which alternative should the manufacturer choose if it the demand is expected to be between 30,000 and 40,000 units? (b) What will be the manufacturer’s profit if the demand is 38,000 units?

Selling price per unit
No of units

Var Cost per unit
Total Sales
Total variable cost
Gross Profit

10
30000

35000

Refurbish modify New Eqpt
70,000
135,000
230,000
7.2
5.25
4.75
300000
216000
84000
0.28

300000
157500
142500
0.475

300000
142500
157500
0.525

40000

Refurbish modify
New Eqpt
70,000 135,000 230,000
7.2
5.25
4.75
350000
252000
98000
0.28

350000
183750
166250
0.475

350000
166250
183750
0.525

38000

Refurbish modify
New Eqpt
70,000 135,000 230,000
7.2
5.25
4.75
400000
288000
112000
0.28

400000
210000
190000
0.475

400000
190000
210000
0.525

Refurbish modify
New Eqpt
70,000 135,000 230,000
7.2
5.25
4.75
380000
273600
106400
0.28

380000
199500
180500
0.475

a) I would choose modifying the production line because the cost will be recovered 100% even if sales is just at 30K> It also gives a 70%(.28 vs .475) more gross profit as compared to refurbish.
New equipment cost will not be recovered even at 40K units sold.
b) The manufacturing

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