A company is evaluating which of two alternatives should be used to produce a product that will sell for $35 per unit.The following cost information describes the two alternatives If total demand (volume)is 120,000 units,then the company should
A)select Process A with a profit of $940,000 to maximize profit
B)select Process B with a profit of $450,000 to maximize profit
C)select Process A with a profit of $700,000 to maximize profit
D)select Process B with a profit of $690,000 to maximize profit

Question

A company is evaluating which of two alternatives should be used to produce a product that will sell for $35 per unit.The following cost information describes the two alternatives  If total demand (volume)is 120,000 units,then the company should
A)select Process A with a profit of $940,000 to maximize profit 
B)select Process B with a profit of $450,000 to maximize profit 
C)select Process A with a profit of $700,000 to maximize profit 
D)select Process B with a profit of $690,000 to maximize profit

Quizplus · Accepted Answer

To determine which process is more profitable, we need to calculate the total cost and revenue for each process. Process A has a total cost of $840,000 + ($4.50 x 120,000) = $1,440,000 and a total revenue of $35 x 120,000 = $4,200,000. This results in a profit of $4,200,000 - $1,440,000 = $2,760,000.

Process B has a total cost of $660,000 + ($5.50 x 120,000) = $1,380,000 and a total revenue of $35 x 120,000 = $4,200,000. This results in a profit of $4,200,000 - $1,380,000 = $2,820,000.

Therefore, Process B seems to be more profitable with a profit of $2,820,000 compared to Process A's profit of $2,760,000. However, we need to consider that Process A has a higher fixed cost, which means that as demand increases, Process A will become more profitable.

To calculate the break-even point, we can use the formula: Break-even point = Fixed cost / (Price - Variable cost)

For Process A: Break-even point = $840,000 / ($35 - $4.50) = 28,800 units
For Process B: Break-even point = $660,000 / ($35 - $5.50) = 22,000 units

If demand is less than 22,000 units, Process A will be more profitable. If demand is between 22,000 units and 28,800 units, both processes will have the same profit. If demand is greater than 28,800 units, Process B will be more profitable.

Since the total demand is 120,000 units, Process A will be more profitable with a profit of $2,760,000.

A Company Is Evaluating Which of Two Alternatives Should Be