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See the BPP exam kits number 26, SH (12/08), the first question(a), I am not understanding the logic of how to do the question can you please help me. I have also see the answers but I do not understand the logic??????
PLEASE REPLY
The 3 choices of vans that they are considering each has different carrying capacity. A small van can carry 100 crates, a medium van 150 crates and a large van 200 crates.
However demand is expected to be either 120 or 190 crates per period.
Therefore if they purchase the small van they will only be able to carry 100 crates even if demand is 120 or 190 crates, hence the 2 different workings for the small van with the same figures (they are showing what the profit will be at both demand levels).
If they purchase the medium van then when demand is 120 crates they will be carrying less than the van’s capacity of 150 crates and therefore will save 10% of the varaiable cost of (120 x $4)= $48
When demand is 190 crates the medium van can only carry 150 and therefore the profit figure is worked out at this capacity.
With the large van the same reasoning as with the medium van occurs. At demand of 120 crates the van is carrying less than its capacity, so 10% of the variable costs is saved and at demand of 190 crates it is still carrying less than its capacity of 200 crates.
I hope this is helpful when you are looking at the answer and the logic becomes clearer
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