The Station, a boutique cookie company, needs to create a production process for its new

cinnamon malt ball cookies. To help accomplish this, the company has put together some
numbers for production costs (per dozen cookies for the variable costs).

Process Type Fixed Costs Labor Costs Material Costs

Pre-Bake $254 $2.55 $0.65

Easy Bake $306 $1.53 $0.48

Speed Bake $531 $1.35 $0.48

The Station projects demand for the semester will be 500 dozen cinnamon malt ball
cookies. Due to the cookies' expected popularity the selling price will be $4.95.
Based on the projected demand (volume) for the semester, which process type should they
select? (Write your answer in the cell below, exactly as shown in column 1 of the table
above.)

Under this process type—the one selected in the previous question—what would be their
profits for the semester? (Display your answer to the nearest whole number.)

If demand were to increase, what would be the break-even point (in unit volume or
demand) between the selected process and the next process option? (Display your answer
to the nearest whole number.)

Beyond this break-even point, which process would be best? (Write your answer in the cell
below, exactly as shown in column 1 of the table above.)

Based on the break-even point (derived two questions back), what would be the total cost?
(Display your answer to one decimal place.)

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Raja Mukherjee answered this
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a) The use of equation method facilitates the computation of break-even point both in units and in
dollars. Break-even analysis states that the sales are equal to total variable and fixed expenses at
break-even point, the equation can therefore be written as follows (Cost-Volume-Profit(CVP)):
px = vx + FC + Profit;

Where p is the price per unit, v is the variable cost per unit, FC is the total fixed cost and x is the
number of units.

Therefore total cost is FC + vx ; Here v = Labor Cost + Material Cost

Total cost of process Pre-Bake = 254 + 500 * (2.55 + 0.65) = $1854

Total cost of process Easy-Bake = 306 + 500 * (1.53 + 0.48) = $1311

Total cost of process Speed-Bake = 531 + 500 * (1.35 + 0.48) = $1446

Process easy bake has the lowest total cost for a production volume of 500 units and therefore seems
to be the most economical process.

b) Profits = Selling Price – Total Cost

= 500 * 4.95 – 1311 = $1164

c) Selected process is easy bake and second option is speed bake.

Let Q be the production volume at the indifference points (points of the intersection of the total cost
line) which is assumed to determine the range of production volumes at which each process is most
economical.

306 + Q (1.53 + 0.48) = 531 + Q (1.35 + 0.48)

Or, 225 = (2.01-1.83)Q

Or, Q = 225/0.18= 1250 units

d)

Beyond this break-even point of production volume 1250 units, process speed bake is selected as it
is clear from the graph that above the break even total cost of speed bake is lower than the total cost
of easy bake.
 e) Based on this break-even point, the total cost = 306 + 1250 (1.53+0.48)= $2818.50 = $2819
(Approximately)

PS.53 Brother I.D. Ricks is a faculty member at BYU-Idaho whose grandchildren live in
Oklahoma and California. He and his wife would like to visit their grandchildren at least
once a year in these states. They currently have one vehicle with well over 150,000 miles
on it, so they want to buy a newer vehicle with fewer miles and that gets better gas
mileage. They are considering two options: (1) a new subcompact car that would cost
$24,500 to purchase or (2) a used sedan that would cost $19,200.
They anticipate that the new subcompact would get 41 miles per gallon (combined highway
and around town driving) while the sedan would get 26 miles per gallon. Based on their
road tripping history they expect to drive 18,000 miles per year. For the purposes of their
analysis they are assuming that gas will cost $2.24 per gallon.
Question: How many miles would the Ricks need to drive before the cost of these two
options would be the same? (Display your answer to the nearest whole number.)
Hint: The challenge with this problem is finding the variable costs. First determine the
variable costs per mile, in terms of gasoline costs. From there you can easily use the break-
even formula to find the break-even point in terms of miles—and then do some simple math
to get the break-even point in years.

How many years would it take for these two options to cost the same? (Display your
answer to twodecimal places.)

Suppose a severe disruption to the petroleum supply resulted in a $2.00 increase to the
price of gasoline. How many miles would it now take before the cost of these two options
would be the same? (Display your answer to the nearest whole number.)

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Four Corners is an IBC company that sells delicious Navajo tacos in the Crossroads Food
Court. Part of their success can be attributed to the freshly fried Indian bread that is used
not only for the tacos, but also for dessert items. As demand grows the fry-bread process is
becoming a bottleneck. Operations management for the company is looking at two different
process options to replace the highly manual process currently being used. Option 1
(medium automation) would cost $175 to implement whereas Option 2 (high automation)
would cost $350. With Option 1 the variable cost per fry bread produced would be $0.20.
The variable cost for Option 2 would be $0.09 per fry bread. At what volume (demand) of
fry breads is the cost for the two options the same? (Display your answer to two decimal
places.) What is the total cost for either option at this break-even volume (answered in the
last question)? (Display your answer to two decimal places.) Please show excel work

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With the given data, we calculate in excel for both the options : the formulae and calculations are
detailed and tabulated below :

So the answers are :

1) The cost of two options will be same at a colume of 1590.91 units of fry bread
2) At this break even volume, the total cost for either option will be $493.18
 Show transcribed image text

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Answers for blanks
1. Foundry 2
2. $11,750,000
3. 375,000
4. Old Fab
Explanation
Given that Selling price (SP) = $80 per unit

Contract Sales = 300,000 units

Material
Process Fixed costs Labor/ unit cost / unit

Foundry 1 $ 1,500,000 17 20

Foundry 2 $ 1,750,000 15 20

Old Fab $ 2,500,000 14 19

New Fab $ 4,000,000 13 19

To find the best “Process”, we need to identify the process which has the highest profit among them.

We know that, Profit = Sales * (Selling price – Variable costs) – Fixed Costs
Where, Variable costs = Labor + Material cost

For example, let’s estimate the profit for Foundry 1 option,

Profit (Foundry 1) = 300000 * (80 – 17 – 20) – 1500000 = $11400000

Similarly, estimating the Profit for other process and tabulated as shown below,

Process Fixed costs Labor/ unit Material cost / unit Profit

Foundry 1 $ 1,500,000 17 20 $ 11,400,000

Foundry 2 $ 1,750,000 15 20 $ 11,750,000

Old Fab $ 2,500,000 14 19 $ 11,600,000

New Fab $ 4,000,000 13 19 $ 10,400,000

As it can noticed in the table above, the best process is Foundry 2, with a highest profit of
$11,750,000
Thus, the gross annual profit of Foundry 2 is $11,750,000
The next process option in the list is Old Fab, to estimate the breakeven point for which Foundry 2
and Old Fab be the same, we have to equate the Total cost (TC) for finding ‘n’ units

Total cost (TC) = Fixed costs + Variable costs per unit * # No of units
For Foundry 2, Fixed costs (FC1) = $1,750,000
For Old Fab, Fixed costs (FC2) = $2,500,000
For Foundry 2, Variable costs (VC1) = 15 + 20 = $35 per unit
For Old Fab, Variable costs (VC2) = 14 + 19 = $33 per unit
TC = FC1 + VC1* n
TC = FC2 + VC2* n
Equating the above two, we get,

FC1 + VC1* n = FC2 + VC2* n

n = (FC2 – FC1) / (VC1 – VC2) = (2,500,000 – 1,750,000) / (35 – 33) = 750,000 / 2 = 375000 units
The breakeven point for the next process (Old Fab) would be best is 375000 units
Beyond the breakeven point, automatically Old Fab would be best as it can evidenced from the
table below for 400,000 units

Profit for

Process Fixed costs Labor/ unit Material cost / unit 400,000 units

Foundry 1 $ 1,500,000 17 20 $ 15,700,000

Foundry 2 $ 1,750,000 15 20 $ 16,250,000

Old Fab $ 2,500,000 14 19

$ 16,300,000

New Fab $ 4,000,000 13 19 $ 15,200,000