EBK PRINCIPLES OF OPERATIONS MANAGEMENT
EBK PRINCIPLES OF OPERATIONS MANAGEMENT
11th Edition
ISBN: 9780135175644
Author: Munson
Publisher: VST
Question
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Chapter 8, Problem 19P

a)

Summary Introduction

To determine: The output at which two locations will have same profit.

Introduction: Location is one of the important element for a business that controls the cost and expenses. Location strategies support in framing other strategies for a firm where optimal location point will provide competitive advantage to a firm.

a)

Expert Solution
Check Mark

Answer to Problem 19P

At 120 machine tools, the profits at both the locations are identical.

Explanation of Solution

Given information:

Site Fixed cost per year Variable cost per year
B $800,000 $14,000
Mc $920,000 $13,000

Calculation to find the output at which two locations will have same profit:

Denote the volume of production of machine tools as “x”.

Given the selling price of each machine tool at $29,000, the total revenues, denoted by TR are

TR=$29,000x (1)

Given the B location has a fixed cost of $800,000 per year and a variable cost of $14,000, express the total cost TCB for a production volume of “x” machine tools as follows.

TCB=$14,000x+$800,000 (2)

Given the Mc location has a fixed cost of $920,000 per year and a variable cost of $13,000, express the total cost TCMc for a production volume of “x” machine tools as follows.

TCMc=$13,000x+$920,000 (3)

Calculate the volume of output “x” where both locations have the same profit

$29,000×x$14,000×x$800,000=$29,000$13,000×x$920,000($29,000$14,000)×x$800,000=($29,000$13,000)×x$920,000$1,000×x=$120,000x=120units

Equating the equations and solving for x, the volume of production of 120 machine tools, the profits at both the locations are identical.

Hence, at 120 machine tools, the profits at both the locations are identical

b)

Summary Introduction

To determine: The output at which location B will have high profit than location Mc.

Introduction: Location is one of the important element for a business that controls the cost and expenses. Location strategies support in framing other strategies for a firm where optimal location point will provide competitive advantage to a firm.

b)

Expert Solution
Check Mark

Answer to Problem 19P

Upto production level of 120 units Location B will have high profit.

Explanation of Solution

Given information:

Site Fixed cost per year Variable cost per year
B $800,000 $14,000
Mc $920,000 $13,000

Calculation to find the output at which location B will have high profit than location Mc:

To find out at what range of output the location B will have higher profits compared to the location Mc draw graphs of the two cost functions TCB and TCMc besides the revenues TR as shown below.

EBK PRINCIPLES OF OPERATIONS MANAGEMENT, Chapter 8, Problem 19P

The graph lines for TCB and TCMc intersect at a production volume of 120 machine tools.

The location B is cost effective up to a production volume of 120 units. Therefore, profitability also will be higher at location B upto a production level of 120 units.

Hence, upto production level of 120 units Location B will have high profit.

c)

Summary Introduction

To determine: The output at which location Mc will have high profit than location B.

c)

Expert Solution
Check Mark

Answer to Problem 19P

For production level above 120 units Location Mc will have high profit.

Explanation of Solution

Given information:

Site Fixed cost per year Variable cost per year
B $800,000 $14,000
Mc $920,000 $13,000

Calculation to find the output at which location Mc will have high profit than location B:

For production volumes above 120 machine tools, the Mc location is preferable as costs are lower and the profitability improves.

Hence, above production level of 120 units Location Mc will have high profit.

d)

Summary Introduction

To determine: The break-even point of each location.

d)

Expert Solution
Check Mark

Answer to Problem 19P

The break-even point for location B is 54 machine tools and for location Mc is 58 machine tools.

Explanation of Solution

Given information:

Site Fixed cost per year Variable cost per year
B $800,000 $14,000
Mc $920,000 $13,000

Calculation of break-even point:

Calculate the break even point for Bhnm location by linking equations (1) and (2), since at the break even point the total revenues are same as total costs.

14,000×x+800,000=29,000×x15,000x=800,000x=800,00015,000=53.3

Ignoring the fractional part, the location B breaks even at a production volume of 54 machine tools.

Similarly calculate the break even point for Mckny location by linking equations (1) and (3), since at the break even point the total revenues are same as total costs.

13,000×x+920,000=29,000×x16,000x=920,000x=920,00016,000x=57.5

Ignoring the fractional part, the Mc location breaks even at a production volume of 58 machine tools. Breakeven production volumes for both the locations are much below the crossover production volume of 120 machine tools.

Hence, the break-even point for location B is 54 machine tools and for location Mc is 58 machine tools.

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Students have asked these similar questions
Peggy Lane Corp., a producer of machine tools, wants to move to a larger site. Two alternative locations have been identified: Bonham and McKinney Bonham would have fixed costs of $780,000 per year and variable costs of $15,000 per standard unit produced McKinney would have annual fixed costs of $920,000 and variable costs of $13,800 per standard unit. The finished items sell for $30,000 each. a) The volume of output at which both the locations have the same profit = standard units (round your response to the nearest whole number). b) Based on the analysis of the volume, after rounding the numbers to the nearest whole number, Bonham is superior below c) Based on the analysis of the volume, after rounding the numbers to the nearest whole number, McKinney is superior above d) The break-even point for Bonham is The break-even point for McKinney is units. (Enter your response rounded to the nearest whole number) units. (Enter your response rounded to the nearest whole number) standard…
Peggy Lane Corp., a producer of machine tools,wants to move to a larger site. Two alternative locations havebeen identified: Bonham and McKinney. Bonham would havefixed costs of $800,000 per year and variable costs of $14,000per standard unit produced. McKinney would have annual fixedcosts of $920,000 and variable costs of $13,000 per standard unit.The finished items sell for $29,000 each.a) At what volume of output would the two locations have thesame profit?b) For what range of output would Bonham be superior (havehigher profits)?c) For what range would McKinney be superior?d) What is the relevance of break-even points for thesecities?
Location Fixed Cost Variable Cost A $100,000 $10 B $150,000 $7 C $200,000 $5 600 Annual 500 Cost ($000) 400 300 200 100 2 4 6 8 10 14 16 18 20 Q (000s of units) i. Plot the total cost curves in the chart provided above and identify the range over which each location would be best. ii. Use break-even analysis to calculate exactly the break-even quantity that defines each range.
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