PRACTICE PROBLEM SET LESSON NO.

10

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?
GIVEN: Design Capacity (Dc) Effective Capacity (Ec) Actual Output (Oa) Efficiency (Em)

= 80 trucks/day = 40 engines/day = 36 engines/day = 82%

Solution:
Actual Output (Oa) Design Capacity (Dc) 36 80 45% Efficiency = Actual Output (Oa) Effective Capacity (Ec) 36 40 90% Actual Output (Oa) Effective Capacity (Ec) Oa 40 32.80

Utilization = = Utilization =

Efficiency

= =

Efficiency 82% Actual Output (Oa) =

= =

Problem 2: Solution:

BEPx

Fixed Cost (F) Price (P) - Variable Cost (V) $1,000 $4 - $2 500.00

BEPs

Fixed Cost (F) 1 - Variable Cost (V)/ Price (P) $1,000 1 - (2/4) $ 2,000.00

= BEPx = $

= BEPs =

Problem 3: Develop the break-even chart for Problem 2.

Break-Even Analysis
$5,000 $4,000

$3,000 $2,000 $1,000

$0 0 ($1,000) 100 200 300 400 500 600 700 800 900 1,000

($2,000) TFC Break-Even Point (units) = 500 Total Fixed Costs Variable Cost per Unit Sales Price per Unit TFC = VCU = SPU = $1,000 $2.00 $4.00 TVC TC Sales Profit Break-Even Point ($'s) = $2,000 Formulas: BEP (units) = TFC/(SPU-VCU) BEP ($'s) = BEP (units) * SPU

Problem 4 & 5: Jacks 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 $1.00, but their volume should increase to 70,000 units due to the higher quality product. Should the company buy the new equipment? What are the break-even points ($ and units) for the two processes considered in Problem 4?
BEFORE IMPROVEMENT BEPx Fixed Cost (F) = Price (P) - Variable Cost (V) = BEPx = $ $12,000 $1.25 - $0.75 24,000.00 BEPs = BEPs = = $ Fixed Cost (F) 1 - Variable Cost (V)/ Price (P) $12,000 1 - (0.75/1.25) 30,000.00 PROFIT = (P - V) x - F ($1.25 - $0.75)(50,000) - 12,000 = $ 13,000.00

PROFIT

AFTER IMPROVEMENT BEPx = Fixed Cost (F) Price (P) - Variable Cost (V) $17,000 $1.25 - $1.00 68,000.00 BEPs = BEPs = Fixed Cost (F) 1 - Variable Cost (V)/ Price (P) $17,000 1 - (1.00/1.25) $ 85,000.00 PROFIT = (P - V) x - F ($1.25 - $1.00)(70,000) - 17,000 = $ 500.00

= BEPx = $

PROFIT

Therefore, since the profit generated is lesser than the original set-up, it is advised to not buy the equipment and check for another alternate improvement.

Problem 6: Develop a break-even chart for Problem 4.

Break-Even Analysis (Before Improvement)

$80,000

$70,000
$60,000

$50,000
$40,000

$30,000
$20,000

$10,000 $0 ($10,000) ($20,000) TFC Break-Even Point (units) = 24,000 Total Fixed Costs Variable Cost per Unit Sales Price per Unit TFC = VCU = SPU = $12,000 $0.75 $1.25 TVC TC Sales Profit Break-Even Point ($'s) = $30,000 Formulas: BEP (units) = TFC/(SPU-VCU) BEP ($'s) = BEP (units) * SPU 0 6,000 12,000 18,000 24,000 30,000 36,000 42,000 48,000 54,000 60,000

Break-Even Analysis (After Improvement)

$170,000 $153,000

$136,000 $119,000 $102,000 $85,000 $68,000 $51,000 $34,000

$17,000 $0 ($17,000) 0 17,000 34,000 51,000 68,000 85,000 102,000 119,000 136,000 153,000 170,000

($34,000) TFC Break-Even Point (units) = 68,000 Total Fixed Costs Variable Cost per Unit Sales Price per Unit TFC = VCU = SPU = $17,000 $1.00 $1.25 TVC TC Sales Profit Break-Even Point ($'s) = $85,000 Formulas: BEP (units) = TFC/(SPU-VCU) BEP ($'s) = BEP (units) * SPU

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? Solution:
YEAR 1 2 3 4 5 NPF PF 0.909 0.826 0.751 0.683 0.621 3.79

PV = 6000 * 3.79 PV = $ 22,740.00