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BSOP 209 Week 3 Assignment Answer

The document presents information on two proposals to increase manufacturing capacity by adding new equipment. Proposal A has fixed costs of $50,000 and variable costs of $12 per unit, while Proposal B has fixed costs of $70,000 and variable costs of $10 per unit. Both generate $20 in revenue per unit. It then calculates the break-even points in units for each proposal and the effect of adding $10,000 in installation costs. Additional questions calculate net present value for various investments giving annual returns over 5-8 years at interest rates of 10-12%.

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Eslam Sabry
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257 views

BSOP 209 Week 3 Assignment Answer

The document presents information on two proposals to increase manufacturing capacity by adding new equipment. Proposal A has fixed costs of $50,000 and variable costs of $12 per unit, while Proposal B has fixed costs of $70,000 and variable costs of $10 per unit. Both generate $20 in revenue per unit. It then calculates the break-even points in units for each proposal and the effect of adding $10,000 in installation costs. Additional questions calculate net present value for various investments giving annual returns over 5-8 years at interest rates of 10-12%.

Uploaded by

Eslam Sabry
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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S7.

17
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 $12.00, and
for B, $10.00. The revenue generated by each unit is $20.00.
a) What is the break-even point in units for proposal A?
Ans:
The break-even point in units for proposal A is:
BEP (x) = F/ (P-V) = $50000 /($20-$12) = 50000/8 = 6250 Units
b) What is the break-even point in units for proposal B?
Ans:
The break-even point in units for proposal B is:
BEP (x) = F/ (P-V) = $70000 /($20-$10) = 70000/10 = 7000 Units

S7.18
Using the data in Problem S7.17:
a) What is the break-even point in dollars for proposal A if you add $10,000 installation to
the fixed cost?
Ans:
The break-even point in Dollar for proposal A is:
BEP (s) = F/ (1-(V/P)) = 60000 /(1- (12/20)) = 60000 /0.4 = $ 150,000

b) What is the break-even point in dollars for proposal B if you add $10,000 installation to
the fixed cost?
Ans:
The break-even point in Dollar for proposal B is:
BEP (s) = F/ (1-(V/P)) = 80000 /(1- (10/20)) = 80000 /0.5 = $ 160,000

S7.30
What is the net present value of an investment that costs $75,000 and has a salvage value of
$45,000? The annual profit from the investment is $15,000 each year for 5 years. The cost of
capital at this risk level is 12%.
Ans:
Initial investment = $75,000
Salvage value = $45,000
Five-year return = $15,000
Cost of capital = 12%
NPV annuity factor → 5 years @ 12% = 3.605 (As per the TABLE S7.2 in the Textbook
-Present Value of an Annuity of $1)

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Present value = 3.605 × 15,000 = $54,075
(TABLE S7.1 in the Textbook - Present Value of a $1 –> 5 Years @ 12 % = 0.567)
Present value of salvage: 0.567 × 45,000 = $25,515
Net present value = 54,075 + 25,515 – 75,000 = $4,590

S7.31
The initial cost of an investment is $65,000 and the cost of capital is 10%. The return is
$16,000 per year for 8 years. What is the net present value?
Ans:
Initial investment = $65,000
Eight-year return = $16,000 per year
Cost of capital = 10%
NPV annuity factor → 8 years @ 10% = 5.335 (As per the TABLE S7.2 in the Textbook
-Present Value of an Annuity of $1)
Present value = 5.335 × $16,000 = $85,360
Net present value = $85,360 – $65,000 = $20,360

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