Old production oper. New production oper.
Unit Variable cost
Material- $.88 $.88 labor 1.22 .22
Total per unit $210 & $110
Monthly fixed costs
Old prod. oper.
Rent and depreciation= $450,000
Supervisory labor = $80,000
Other = $50,000
Total per month = $580,000
New production operation
Rent and depreciation =$875,000
Supervisory labor =175,000
Other =90,000
Total per month =1,140,000
Expected volume is 600,000 units per month, with each unit selling for $3.10. Capacity is 800,000 units.
1. Compute the budgeted profit at the expected volume of 600,000 units under both the old and the new production environments.
2. Compute the budgeted break-even point under both the old and the new production environments.
3. Discuss the effect on profits if volume falls to 500,000 units under both the old and the new production environments.
4. Discuss the effect on profits if volume increases to 700,000 units under both the old and the new production environments.
5. Comment on the riskiness of the new operation versus the old operation. SOLUTION
