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Week 5 Assignment

The document discusses capacity planning concepts including: 1) Examples of calculating break-even points in units and dollars for different businesses with given fixed costs, variable costs, and selling prices. 2) The definitions of design capacity as the maximum output of a system, effective capacity as what a firm expects to achieve, and actual production amount. 3) The key assumptions of break-even analysis that fixed costs do not vary with volume, variable costs are constant per unit, and revenues are constant per unit. 4) When a firm would want capacity to lag or lead demand - lagging if demand exceeds capacity, leading if capacity exceeds demand.

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NGUYEN HAI
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876 views

Week 5 Assignment

The document discusses capacity planning concepts including: 1) Examples of calculating break-even points in units and dollars for different businesses with given fixed costs, variable costs, and selling prices. 2) The definitions of design capacity as the maximum output of a system, effective capacity as what a firm expects to achieve, and actual production amount. 3) The key assumptions of break-even analysis that fixed costs do not vary with volume, variable costs are constant per unit, and revenues are constant per unit. 4) When a firm would want capacity to lag or lead demand - lagging if demand exceeds capacity, leading if capacity exceeds demand.

Uploaded by

NGUYEN HAI
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Name: Nguyen Chi Hai

Student id: 014201800122

Home exercise week 5: Capacity Planning

1. Marty McDonald has a side business packaging software in Wisconsin. His annual fixed cost is
$10,000, variable cost is $ 8 per unit. The selling price will be $ 12.50 per package. What is the
break-even point in dollars? What is break even in units?
F = $10000
V = $8
P = $12.50
BEP ($) = F/(1 - (V-P)) = $10,000/(1 - ($8 - $12.50)) = $27,777
BEP (x) = F/(P – V) = $10,000/($12.50 - $8) = 2,222 units
2. Smith Cutting is opening a new line of scissors for supermarket distribution. it estimates its fixed
cost to be $500 and its variable cost to be %0.50 per unit. Selling price is expected to average
$0.75 per unit.
a. What is Smithson's break even point in units?
b. What is the break-even point in dollars?
F = $500
V = %0.5
P = $0.75
a. BEP (x) = F/(P – V) = $500/($0.75 - $0.5) = 2000 units
b. BEP ($) = F/(1 - (V – P)) = $500/(1 – ($0.5 - $0.75) = $1,500
3. Markland Manufacturing intends to increase capacity by overcoming a bottleneck operation by
adding new equipment. two vendors have presented proposals. The fixed costs for proposal A
are $50,000 and for proposal B $70,000. The variable cost for A is $12 and for B is $ 10. The
revenue generated by each unit is $20
a. What is the break even point in units for proposal A?
b. What is the break even point in units for proposal B?
FA = $50,000
FB = $70,000
VA = $12
VB = $10
P = PA = PB = $20
BEP (xA) = FA/(P – VA) = $50,000/($20 – $12) = 6,250 units
BEP (xB) = FB/(P – VB) = $70,000/($20 - $10) = 7,000 units
4. Given the following data, calculate:
a. BEP in units
b. BEP in dollar
c. Profit at 100,000 units.

Selling price (P) = $8/unit , Variable Cost (V) = $4/unit, Fixed Cost (F) = $50,000

a. BEP (x) = F/(P – V) = $50,000/($8 - $4) = 12,500 units


b. BEP ($) = F/(1 – (V – P)) = $50,000/(1 – ($4 - $8)) = $10,000
c. Profit at 100,000 units = 100,000($8 - $4) - $50,000 = $350,000
5. You are considering opening a copy service in the student union. You estimate your fixed cost at
$15,000 and the variable cost of each copy sold at $0.01. You expect the selling price to average
$0.05
a. What is the break event point in dollars?
b. What is the break even point in units?
F = $15,000
V = $0.01
P = $0.05
a. BEP ($) = F/(1 – (V – P)) = $15,000/(1 – ($0.01 - $0.05)) = $14,423
b. BEP (x) = F/(P – V) = $15,000/($0.05 - $0.01) = 375,000 units
6. Design capacity is the maximum output of a system. Normally expressed as a rate.
Example: A large organization is poorly structured such that adding more staff only decreases
revenue.
Effective capacity is the capacity a firm expects to achieve.
Example: A flight has an effective capacity of 220 passengers based on the design of the aircraft
and availability of staff and inputs such as fuel.
The amount of a product that a production facility actually produces, as opposed to the amount
that it could produce if it were to run at full theoretical capacity
7. The assumptions of break even analysis:
- fixed costs do not vary with volume
- unit variable costs do not vary with volume
- unit revenues do not vary with volume

8. Under what conditions would a firm want its capacity to lag demand? to lead demand?

-A firm would want to lag demand if demand exceeds capacity

-A firm would want to lead demand if capacity exceeds demand

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