A distributor of fasteners is opening a new plant and considering whether to use a mechanized process or a manual process to package the product. The manual process will have a fixed cost of $36,234 and a variable cost of $2.14 per bag. The mechanized process would have a fixed cost of $84,420 and a variable cost of $1.85 per bag. The company expects to sell each bag of fasteners for $2.75. a) What is the break-even point for the manual process (in units)?
b) What is the break-even point for the mechanized process (in units)?
c) A point of indifference for two processes is quantity at which each process generates the same amount of profit (review video). What is the point of indifference for the two processes?
(Hint: 1) Use equations to set profit of manual process equal to mechanized process – and solve for quantity; 2) (Excel) If you have a break-even for each process – add another cell the calculates the difference for the profits between the two processes and have only one cell that represents quantity that be used to calculates costs/revenues for each process and use Goal Seek to calculate quantity that would set the difference to zero).
d) Which process would you select if the quantity that is sold is greater than the quantity calculated as the point of indifference?
e) Which process would you select in the quantity sold is less than the quantity calculated as the point of indifference?