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Kenneth P. Javier GC22

- A farmer is deciding when to harvest his soybean crop, which will yield 1,000 bushels initially and increase by 1,200 bushels per week, while the price drops 50 cents per bushel weekly and 200 bushels are lost to spoilage each week. - The optimal time to harvest is the 2nd or 3rd week to earn a net return of $6,000. - A wood products company is considering a contract to sell plywood overseas. The optimal monthly sales volume that breaks even is 444.5 units, but this will result in a loss of $701,209.875. The range of profitable demand is 444.5 units plus or minus 1

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Kenneth Peña Javier
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249 views3 pages

Kenneth P. Javier GC22

- A farmer is deciding when to harvest his soybean crop, which will yield 1,000 bushels initially and increase by 1,200 bushels per week, while the price drops 50 cents per bushel weekly and 200 bushels are lost to spoilage each week. - The optimal time to harvest is the 2nd or 3rd week to earn a net return of $6,000. - A wood products company is considering a contract to sell plywood overseas. The optimal monthly sales volume that breaks even is 444.5 units, but this will result in a loss of $701,209.875. The range of profitable demand is 444.5 units plus or minus 1

Uploaded by

Kenneth Peña Javier
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 PDF, TXT or read online on Scribd
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KENNETH P.

JAVIER GC22

PROBLEM SET 2
1. A farmer estimates that if he harvests his soybean crop now, he will obtain 1,000 bushels, which
he can sell at $3.00 per bushel. However, he estimates that this crop will increase by an
additional 1,200 bushels of soybeans for each week he delays harvesting, but the price will drop
at a rate of 50 cents per bushel per week: in addition, it is likely that he will experience spoilage
of approximately 200 bushels per week for each week he delays harvesting. When should he
harvest his crop to obtain the largest net cash return, and how much will be received for his
crop at that time?

Solution:

Equation to be used:

𝑃 = 𝑎 – 𝑏𝐷
Standard cost = standard price*standard quantity

Given:

Selling Price = $3.00


No. of Bushels = 1,000
Additional Bushels Each Week = 1,200
Spoilage Bushels/Week = 200
Drop rate per bushels per week = $0.5

𝑃 = 𝑎 – 𝑏𝐷
𝑃 = $3.00 − $0.5𝐷

Standard cost = 1,000(bushels)*$3.00 = $3,000

1st Week
1000 + 1200 – 200 = 2000 ∗ ($3.00 − $0.50) = $5000
2nd Week
2000 + 1200 – 200 = 3000 ∗ ($3.00 − $1.00) = $6000
3rd Week
3000 + 1200 − 200 = 4000 ∗ ($3.00 − $1.50) = $6000
4th Week
4000 + 1200 − 200 = 5000 ∗ ($3.00 − $2.00) = $5000
∴ The farmer should harvest his crop in the 2nd or 3rd week for a profit of $6,000.

GEAL201 ENGINEERING ECONOMICS


SY 2019-2020
KENNETH P. JAVIER GC22

PROBLEM SET 2
2. A large wood products company is negotiating a contract to sell plywood overseas. The fixed
cost that can be allocated to the production of plywood is $800,000 per month. The variable
cost per thousand board feet is $155.50. The price charged will be determined by 𝑃 =
$600 – (0.5)𝐷 per 1,000 board feet.
a. For this situation, determine the optimal monthly sales volume for this product and
calculate the profit (or loss) at the optimal volume.
b. What is the domain of profitable demand during a month?

Solution:

Given:

𝑃 = $600 − (0.5)𝐷
𝐶𝐹 = $800,000 per month
𝐶𝑣 = $155.50

(𝑎 – 𝐶𝑣 ) ($600−$155.50)
a. 𝐷 = 2𝑏
= 2(0.5)
= 444.5

𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝐿𝑜𝑠𝑠 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 – 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡


= (𝑎𝐷 – 𝑏𝐷2) – (𝐶𝐹 + 𝐶𝑣𝐷)

= [$600(444.5) – 0.5(444.5)2 ] – [$800,000 + $155.5(444.5)]


= −$701,209.875
∴ There is a loss of $701,209.875 per month at the optimal volume

b. 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡


𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 – 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 0
−0.5𝐷2 + ($600 − $155.5)𝐷 − $800,000 = 0

∴ D1 = 444.5 + 1184.24i and D2 = 444.5 − 1184.24i units per month is the profitable demand

GEAL201 ENGINEERING ECONOMICS


SY 2019-2020
KENNETH P. JAVIER GC22

PROBLEM SET 2
3. The annual fixed costs for a plant are $100,000, and the variable costs are $140,000 at 70%
utilization of available capacity, with net sales of $280,000. What is the breakeven point in units
of production if the selling price per unit is $40?

Solution:

Given:

𝐶𝐹 = $100,000
𝐶𝑉 = $140,000
𝑃 = $40
Net Sales/ Total Revenue = $280,000

Breakeven Point
𝑇𝑅 $280,000
𝐷= = = $7,000 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑃 $40

𝐶𝑇 = 𝐶𝐹 + 𝐶𝑉 𝐷
𝐶𝑇 − 𝐶𝐹 $280,000 − $140,000
𝐶𝑉 = = = $20 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝐷 7000
𝐶𝐹 $100,000
𝐷′ = = = $5,000 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑃 − 𝐶𝑉 $40 − $20

∴ The breakeven point in units of production is $5,000 per unit if the selling price per unit is $40

GEAL201 ENGINEERING ECONOMICS


SY 2019-2020

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