First Scale of operations

1. Management believes it can sell a new product for $250. The fixed costs of production are estimated to be $50,000 and the variable costs are $215 a unit for the first scale of operations. The fixed costs of production are estimated to be at $150,000 and variable costs are $170 a unit for the second scale of operations.

        a.  Prepare a table similar to the one below and complete with the given levels of output and the relationships between quantity and fixed cost, quantity and variable costs, and quantity and total costs.

 

First Scale of operations

Quantity	Total Revenue	Variable Costs	Fixed Costs	Total Costs	Profits (Loss)
0
500
1,000
1,500
2,000
2,500
3,000

 

Second scale of operations

Quantity	Total Revenue	Variable Costs	Fixed Costs	Total Costs	Profits (Loss)
0
500
1,000
1,500
2,000
2,500
3,000

      b.  What is the exact break-even number of units sold for each scale of operations?

 

      c.   Assume that ½ of the fixed costs in each scale of operations is non-cash depreciation. What is the cash flow generated by each scale of operations if 1,000 of units are sold?

 

      d.   You have been asked to advise the management of this company on which scale of production to use. Let us assume that the management is uncertain on how many units they can sell, but estimate it will be between 500 and 3,000 units during the first year and progressively more after that. Please advise management what you learned from the breakeven analysis and the tables that you devised that should help them make up their minds. Give them pros and cons for both alternatives.

 

1. The management of a firm wants to introduce a new product. The product will sell for $15.00 a unit and can be produced by either of two scales of operation. Following are the total costs:

First scale of operation
TC = $20,000 + $10.00Q

Second scale of operation
TC = $40,000 + $5.00Q

Following are the anticipated levels of sales:

Year	Unit Sales
1	3,000
2	3,500
3	4,000
4	5,000

What can management expect for profits or losses in years 1 and 2 if it selects the scale of operations with lower fixed costs? On what grounds can managem

 

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First Scale of operations was first posted on August 26, 2019 at 1:37 pm.
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First Scale of operations was first posted on August 26, 2019 at 2:09 pm.
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