Question

Bernie Harris is considering different options for making or buying goods for her catering business that she would then (re)sell. She can buy the goods for $210.00 each (this is the "Buy" option). The "LowFCMedVC" option allows her to make the goods with a low fixed cost of $90,000.00 and medium variable cost of $65.00. The "HighFCLOWVC" option allows her to make the goods with a high fixed cost of $210,000.00 and low variable cost of $20.00. She can sell each good for $270.00.

a. What is the point in units where the LowFCMedVC and HighFCLowVC options are equally attractive (from a cost standpoint)?
b. How much profit would Bernie have at the point where the Buy and LowFCMedVC options are equally attractive (from a cost standpoint)?

Answer 1

a) The LowFCMedVC and HighFCLowVC options are equally attractive from a cost standpoint at a quantity of approximately 2,667 units. b) The profit at the point where the Buy and LowFCMedVC options are equally attractive from a cost standpoint is $98,280.

Step-by-step explanation:

a. To determine the point where the LowFCMedVC and HighFCLowVC options are equally attractive from a cost standpoint, we need to compare the total cost of each option. The LowFCMedVC option has a low fixed cost of $90,000 and a medium variable cost of $65. The HighFCLOWVC option has a high fixed cost of $210,000 and a low variable cost of $20. By setting the total cost of both options equal to each other, we can solve for the quantity of goods produced:

90,000 + 65Q = 210,000 + 20Q

45Q = 120,000

Q = 2,666.67

Therefore, at a quantity of approximately 2,667 units, the LowFCMedVC and HighFCLowVC options are equally attractive from a cost standpoint.

b. To calculate the profit at the point where the Buy and LowFCMedVC options are equally attractive from a cost standpoint, we need to compare the total cost and revenue of each option. The Buy option has a cost of $210 per unit, and the LowFCMedVC option has a cost of $90,000 + $65Q. Both options generate a revenue of $270 per unit. Setting the total cost and revenue of both options equal to each other, we can solve for the quantity of goods produced:

210Q = 90,000 + 65Q + 270Q

210Q = 90,000 + 335Q

-125Q = -90,000

Q = 720

Therefore, at a quantity of 720 units, the Buy and LowFCMedVC options are equally attractive from a cost standpoint. To calculate the profit, we can subtract the total cost from the total revenue:

Profit = (270 * 720) - (90,000 + 65 * 720) = $98,280