ABC Company is the manufacturer of a low-noise air-purification system. Its current capacity is 10,000 units/month, but ABC received orders totaling 9,000 units each month. Currently, ABC sells its system at a price of $200 per unit, its fixed cost is $500,000/month, and its variable cost is $100/unit. Note that currently, half of ABC’s variable cost is materials, and the other half is labor cost (wages for workers). ABC wants to consider cutting its price by 10% to stimulate demand. If ABC expands its capacity, it will have to lease additional manufacturing machines, each of which will cost $20,000/month to lease and can add 1000 units to ABC’s capacity. All existing workers are already working full-time. So, if ABC expands production, ABC has to either pay existing employees for overtime (1.5 times the regular wages) or hire new workers, who are expected to be paid 90% of the hourly wage of existing workers but produce only 75% of the hourly output of existing workers. (a) What is ABC’s current monthly profit (before the price cut)? (b) What is the product’s per-unit variable cost for new workers? Should ABC use new workers rather than pay overtime wages to existing employees if it wants to expand production? (c) What are the incremental breakeven unit sales for the 10% price cut? If ABC’s monthly order is estimated to increase by no more than 24% after the 10% price cut, should ABC implement the price cut?
ABC Company is the manufacturer of a low-noise air-purification system. Its current capacity is 10,000 units/month, but ABC received orders totaling 9,000 units each month. Currently, ABC sells its system at a price of $200 per unit, its fixed cost is $500,000/month, and its variable cost is $100/unit. Note that currently, half of ABC’s variable cost is materials, and the other half is labor cost (wages for workers). ABC wants to consider cutting its price by 10% to stimulate demand. If ABC expands its capacity, it will have to lease additional manufacturing machines, each of which will cost $20,000/month to lease and can add 1000 units to ABC’s capacity. All existing workers are already working full-time. So, if ABC expands production, ABC has to either pay existing employees for overtime (1.5 times the regular wages) or hire new workers, who are expected to be paid 90% of the hourly wage of existing workers but produce only 75% of the hourly output of existing workers.
(a) What is ABC’s current monthly profit (before the price cut)?
(b) What is the product’s per-unit variable cost for new workers? Should ABC use new workers rather than pay overtime wages to existing employees if it wants to expand production?
(c) What are the incremental breakeven unit sales for the 10% price cut? If ABC’s monthly order is estimated to increase by no more than 24% after the 10% price cut, should ABC implement the price cut?
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