WINDCHEATER CAR ROOFRACKS The sole owner of Windcheater Car Roofracks needs to expand output as a result
Question:
WINDCHEATER CAR ROOFRACKS The sole owner of Windcheater Car Roofracks needs to expand output as a result of increasing demand from motor accessory shops. The business uses batch production to produce its roof racks. Current output capacity has been reached at 5000 units per year. Each rack is sold to the retailers for $40. Production costs are:
direct labour $10
direct materials $12
fixed costs $54 000. The owner is considering two options for expansion: Option 1 Extend the existing premises, but keep the same method of production. This would increase fixed costs by $27 000 per year and direct costs would remain unchanged. Capacity would be doubled. Option 2 Purchase new machinery, which will speed up the production process and cut down on wasted materials. Fixed costs would rise by $6000 per year, but direct costs would be reduced by $2 per unit. Output capacity would increase by 50%.
20 marks, 40 minutes
1. Construct a fully labelled break-even chart for options 1 and 2. Calculate the break-even points and maximum profit for each option. [6]
2. On the basis of your calculations and break-even charts, explain which option Windcheater should choose. [4]
3. Evaluate the usefulness of break-even analysis to businesses such as Windcheater. [10]
International Marketing And Export Management
ISBN: 9781292016924
8th Edition
Authors: Gerald Albaum , Alexander Josiassen , Edwin Duerr