Practice Problems

Practice Problems Problem 1: The design capacity for engine repair in our company is 80 trucks/day. The effective capacity is 40 engines/day and the actual output is 36 engines/day. Calculate the utilization and efficiency of the operation. If the efficiency for next month is expected to be 82%, what is the expected output? © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Utilization = = = 45% 36 80 Actual output Design capacity Efficiency = = = 90% Actual output Effective capacity 36 40 Practice Problems Problem 1: The design capacity for engine repair in our company is 80 trucks/day. The effective capacity is 40 engines/day and the actual output is 36 engines/day. Calculate the utilization and efficiency of the operation. If the efficiency for next month is expected to be 82%, what is the expected output? Expected output = (Effective capacity)(Efficiency) = (40)(0.82) = 32.8 engines/day © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Practice Problems Problem 2: Given: F = fixed cost = $1,000 V = variable cost = $2/unit P = selling price = $4/unit Find the break-even point in $ and in units. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

1000 1 – 2/4 F V P Break-even point ($) = BEP($) = = = = $2,000 1 – 1000 0.5 F 1000 4 – 2 Break-even point (x) = BEP(x) = = = 500 units P – V Practice Problems Problem 2: Given: F = fixed cost = $1,000 V = variable cost = $2/unit P = selling price = $4/unit Find the break-even point in $ and in units. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Practice Problems Problem 4: Jack’s Grocery is manufacturing a “store brand” item that has a variable cost of $0.75 per unit and a selling price of $1.25 per unit. Fixed costs are $12,000. Current volume is 50,000 units. The Grocery can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $5,000. Variable cost would increase to $1.00, but their volume should increase to 70,000 units due to the higher quality product. Should the company buy the new equipment? © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Practice Problems Profit = TR – TC Problem 4: Jack’s Grocery is manufacturing a “store brand” item that has a variable cost of $0.75 per unit and a selling price of $1.25 per unit. Fixed costs are $12,000. Current volume is 50,000 units. The Grocery can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $5,000. Variable cost would increase to $1.00, but their volume should increase to 70,000 units due to the higher quality product. Should the company buy the new equipment? Option A – Stay as is: Profit = 50,000 * (1.25 – 0.75) – 12,000 = $13,000 Option B – Add equipment: Profit = 70,000 * (1.25 – 1.00) – 17,000 = $500 © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Practice Problems Current: Variable cost = $0.75 New: Variable cost = $1.00 Selling price = $1.25 Selling price = $1.25 Fixed costs = $12,000 Fixed costs = $17,000 Volume = 50,000 units Volume = 70,000 units Problem 5: What are the break-even points ($ and units) for the two processes considered in Problem 4? © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

F 12000 0.4 12000 1 – .75/1.25 Break-even point ($) = BEP($) = = = = $30,000 1 – V P V P Using the new equipment: 12000 1.25 – .75 F Break-even point (x) = BEP(x) = = = 24,000 units F 17000 0.2 17000 1 – 1.00/1.25 P – V Break-even point ($) = BEP($) = = = = $85,000 1 – 17000 1.25 – 1.00 F Break-even point (x) = BEP(x) = = = 68,000 units P – V Practice Problems Current: Variable cost = $0.75 New: Variable cost = $1.00 Selling price = $1.25 Selling price = $1.25 Fixed costs = $12,000 Fixed costs = $17,000 Volume = 50,000 units Volume = 70,000 units Problem 5: What are the break-even points ($ and units) for the two processes considered in Problem 4? Using current equipment: © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Practice Problems Current: Variable cost = $0.75 New: Variable cost = $1.00 Selling price = $1.25 Selling price = $1.25 Fixed costs = $12,000 Fixed costs = $17,000 Volume = 50,000 units Volume = 70,000 units BEP($) = $30,000 BEP($) = $85,000 BEP(x) = 24,000 unitsBEP(x) = 68,000 units Problem 6: Develop a break-even chart for Problem 4. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Practice Problems Problem 7: Good News! You are going to receive $6,000 in each of the next 5 years for sale of used machinery. A bank is willing to lend you the present value of the money in the meantime at discount of 10% per year. How much cash do you receive now? © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Practice Problems Problem 7: Good News! You are going to receive $6,000 in each of the next 5 years for sale of used machinery. A bank is willing to lend you the present value of the money in the meantime at discount of 10% per year. How much cash do you receive now? The net present value factor for 10% and 5 years is 3.79 From Table S7.1: (3.79 = 0.909 + 0.826 + 0.751 + 0.638 + 0.621) Therefore, the present value is: 3.79 * $6,000 = $22,740 © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Practice Problems