# Question & Answer: Having been in a good business for years, a bakery shop is now considering an upgrade…..

Having been in a good business for years, a bakery shop is now considering an upgrade. Currently, the shop mainly operates manual processes with only \$1, 500 fixed cost a year and \$40 for each cake it produces. Hilda, the owner is reviewing two alternatives: semi-automatic and full-automatic equipment. Semi-automatic equipment can lower down the cost to only \$25 a cake at \$6,000 fixed cost a year. Using full-automatic equipment can reduce the cost significantly to \$12 a cake. However, the fixed cost will increase to \$15,000 a year. a. Which alternative should Hilda choose? b. Draw the graph to illustrate this situation

Assume that the bakery shop produces x number of cakes in a year

Total cost in current situation,

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Total cost = fixed cost + variable cost

= fixed cost + (cost for each cake * no. of cakes produced)

= \$1,500 + \$40 * x

Total cost of semi-automatic situation,

Total cost = fixed cost + variable cost

= fixed cost + (cost for each cake * no. of cakes produced)

= \$6,000 + \$25 * x

Total cost of full-automatic situation,

Total cost = fixed cost + variable cost

= fixed cost + (cost for each cake * no. of cakes produced)

= \$15,000 + \$12 * x

Let’s calculate total cost of production by assuming number for x

 No. of cakes produced in a year (x) Total cost under current situation Total cost under semi-automatic situation Total cost under full-automatic situation 100 5500 8500 16200 200 9500 11000 17400 300 13500 13500 18600 400 17500 16000 19800 500 21500 18500 21000 600 25500 21000 22200 700 29500 23500 23400 800 33500 26000 24600 900 37500 28500 25800 1000 41500 31000 27000

a. If the bakery shop is producing below 300 cakes per year then current situation is most cost effective for them

If the bakery shop is producing between 300 -700 cakes per year then semi-automatic situation is most cost effective for them

And if the bakery shop is producing more than 700 cakes per year then full-automatic situation is most cost effective for them

b. Graphical illustration of situation.