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Currently: SP was 20. Vc was 8. Fc was 840000pa.
So breakeven was 840000/12 which is 70000unitBut When they carriedout newplant FC Has 1200000pa But Vc decreased to 5pu.
So Now breakeven was 1200000/20-5 which is 80000unitNow if the Company Wanted to B/even same quantity as old the Selling Price would be like: 70000*X=1200000 which comes 17.14 for the Contribution PU. So 17.14+Vc 5 which is 22.14 will be the selling price.
The Next part is confusing for me:
If the new plant is built, the company would wants to decrease its price to $19 to improve its competitive position.
i. At which quantity would profits of the old and the new plants be equal (assuming the price of a toaster is $20 for the old plant but $19 for the new)? How much would the profit be at this quantity?
ii. If sale are projected to reach 150,000 units per year in the near future, would you recommend construction of the new plant? Why or why not? (Assume that both plants have the capacity to produce this quantity.)
Can you please Tell me how to do this one. Please soon. Thankx
For part (i), with the old plant the contribution will be $12 per unit, so if the quantity was Q units then the total profit would be 12Q – 84,000.
With the new plant, the contribution will be $14 per unit (19-5), so with quantity Q, the profit will be 14Q – 120,000.
To make the same profit you need to make the two equal and then you can calculate Q.For part (ii), since you have the equations for the total profit for both old and new plant, you simply need to put Q = 150000 and see which gives the greater profit.
(This ignores depreciation – unless it was mentioned somewhere in the question then there is no choice but to assume that it is included already in the fixed costs).
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