Chris and Jack own a new startup company with the goal of designing and making high performancemountain
Question:
Chris and Jack own a new startup company with the goal of designing and making high performancemountain bikes. Since they are just starting out, they do not have a good predictability of demand. They anticipate selling their product for $3,500. Chris estimates the fixed cost for space and equipment as $140,000, and the material and labor costs as $1750 per unit.
a) What volume of demand will be necessary for Chris and Jack to break even on their new adventure? Use both algebraic and graphic approaches to get your answer.
b) Jack believes that the demand will exceed the breakeven point found in part a. He proposes spending $190,000 in fixed costs to buy a more automated equipment that would reduce the material and labor costs to $1,350. The bikes would sell for $3,500, regardless of the equipment chosen. Using a graphic approach, compare the two manufacturing processes and determine for what level of demand each process would be preferred.
Principles of Risk Management and Insurance
ISBN: 978-0132992916
12th edition
Authors: George E. Rejda, Michael McNamara