Problem 1

Worthington Machining must decide whether to purchase Process A with specialized metal folding equipment needing two employees to operate it or Process B with general purpose folding equipment requiring five employees. Process A requires a fixed cost of $1,430,000 and a variable cost of $14.32 per metal panel. Process B requires a fixed cost of $820,000 and a variable cost of $20.05. Process A is more automated than Process B.

a. What is the break-even quantity between these two processes?

b. If predicted demand for next year is 120,000 panel folds, what process do you recommend? What is the cost savings?

Problem 2

Dots Restaurant must decide between two technology processes in their kitchen. They only serve dinner after 4 p.m. on a small island called Sanibel. The restaurant is open 250 days per year. Dot and her husband, Ham, are retired. They became bored playing golf five times a week and decided to open this boutique restaurant. Process A uses an induction oven and microwave process with a fixed cost of $44,000 and a variable cost of $4.19 per meal. Process B uses a gas fired oven process with heating lamps with a fixed cost of $28,000 and a variable cost of $5.86 per meal. Process A speeds up cooking and delivery time. The average selling price per meal is $31.38.

a. What is the break-even quantity?

b. If the restaurant manager expects to sell 10,000 meals, which option, A or B, is best? Justify.

c. Is the restaurant profitable if they purchase the process option you recommend in part (b)?