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(Solved) You are considering in a mass assembly production line that will manufacture 3 models (A, B, C) of a product.


You are considering in a mass assembly production line that will manufacture 3 models (A, B, C) of a product. If built, the annual fixed cost (depreciation expense and other fixed expenses directly tied to the operation of the machine) for the production line is $3 million. Each unit of product A, B, and C sells for $20, $22, and $25, respectively. Product A has $5 per unit variable cost, product B has $6 per unit variable cost, and Product C has $7 per unit variable cost. Labor, materials, and energy costs are factored into the variable costs.


The manufacturer forecasts that its annual sales (or composition of total unit sales) of products A, B, and C will follow this distribution: 40 percent will be product A, 25 percent will be product B, and 35 percent will be Product C.


20

a.      What is the annual breakeven point for the assembly production line? Show work. (5 pts)

Qbep=FC/UCM

=(3,000,000)/(22-6)

=183,673.47


b.      At this point, the only decision criterion being considered by the company is the ability of the proposed project to generate profit. Management will only consider the project as financially viable if they can be assured that the breakeven amount computed in part a is very likely to be achieved (at least 95% probability) given the following past demand information: (1) Ten year total (all 3 products combined) average annual demand – 200,000 units, and (2) standard deviation of annual demand – 6,500 units.


Does the proposed project meet management’s required assurance in terms of being able to meet the breakeven point? Explain why or why not. Support your answer with numerical analysis. Do not express an unsupported opinion. (10 points)

 


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