Question & Answer: Due to new infrastructure projects and changes in city planning A auto parts manufacturing unit is…

Due to new infrastructure projects and changes in city planning A auto parts manufacturing unit is considering the relocation meaning it is moving to a different place. The owner estimates that he would incur a fixed cost of 6000$ per week and the labour, energy and material costs to produce it is moving to a different place. The owner estimates that he would incur a He estimates and the labour, energy material costs to produce cake at that location will be 0.8$. He estimates that the selling price of the cake can be 1.8$. What number of auto parts must be sold in order to break even? For this new location, What profit or loss would there be on a sale of 22,000 parts per week? What number of parts will be required if the owner wants to realize a profit of 10000$. Suppose the manufacturer decides to buy a powerful motor of 500$ and a new lathe machine of 500$ which will increase the fixed cost by 1000$ more. As motor and new machine will be added to fixed cost. In this revised scenario what will be impact on break even point and now to earn a profit of 10,000$ how many pieces will be required to sell.

Expert Answer

Fixed cost of manufacturing per week = $6000

Variable cost of manufacturing auto parts at new location per unit = 0.8$

Selling price of the auto parts per unit = $1.8

Let sales per week be = S

Part 1:

Therefore, in order to break even,

Total Fixed cost + Total Variable cost = Total Sales (in dollar value)

$6000 + 0.8$ X S = $1.8 X S

$6000 = $1.0 X S
S = 6000 auto parts

Part 2:

Expected Sales per week = 22,000

Therefore, sales per week in dollar value = 22,000 X $1.8 = $39600

Fixed cost of manufacturing per week = $6000

Variable cost for manufacturing 22,000 auto parts = $0.8 X 22,000 = $17,600

Therefore, Total cost = Fixed Cost + Variable Cost = $17,600 + $6000 = $23,600

Hence, Total Profit/Loss per week = Total revenue per week – Total cost per week = $39,600 – $23,600

= $16,000

Part 3:

Expected Profit = $10000

Let Sales per week be = ‘S’

We know that,

Profit = Total Revenue – Total cost

Therefore,

$10000 = $1.8 X S – ($6000 + $0.8 X S)

$10000 = $1.0 X S – $6000
$1.0 X S = $10000 + $6000
S = 16000

Part 4:

New Fixed cost = $6000 + $500 + $500 = $7000

Therefore, in order to break even,

Total Fixed cost + Total Variable cost = Total Sales (in dollar value)

$7000 + 0.8$ X S = $1.8 X S

$7000 = $1.0 X S
S = 7000 auto parts

And, in order to make a profit of $10000

$10000 = $1.8 X S – ($7000 + $0.8 X S)

$10000 = $1.0 X S – $7000
$1.0 X S = $10000 + $7000
S = 17000

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