Problem 1

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 $40,000 for A and $30,000 for B; variable costs per unit would be $10 for A and $11 for B; and revenue per unit would be $15.

1. Find the break-even point for each alternative
2. At what volume both alternatives yield the same profit?
3. If the volume change (5000, 10000,12000, 15000 and 20000) and the monthly fixed costs increase by (500, 100 and 1500), perform a 2-way sensitivity analysis and draw the proper conclusions on what alternative you would recommend based on the profit.