BBT 41002: Industrial Management

Tutorial Exercises for Chapter 2: Plant Setup

1. Product XYZ can be produced by using either process A or process B. Process A has a fixed costs of RM40,000 per year and variable costs of RM9 per unit. Process B has a fixed cost of RM 16,000 and variable costs of RM24 per unit. What is the breakeven quantity for process A and B? [Ans: 1,600 units] A firm has annual fixed costs of RM3.2 million and variable costs of RM7 per unit. It is considering an additional investment of RM800,000 that will increase the fixed costs by RM150,000 per year and will increase the contribution by RM2 per unit. no change is anticipated in the sales volume or the sales price of RM15 per unit. What is the break-even quantity if the new investment is made? [Ans: 558,333 units] A local furniture manufacturer decides to relocate its existing obsolete plant. The company had done a study on several locations and finally came up with three alternatives to decide. The cost structures (in RM) of the locations are as follows: Factors Land Construction Building Equipment & Machinery Total Variable Cost (per unit) Location A 150,000 800,000 700,000 100 Location B 300,000 500,000 800,000 130 Location C 200,000 700,000 600,000 150

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The product can be sold at RM250 per unit and the estimated annual production for each location is 32,000 units. a) Based upon the above cost structures, which location should be the chosen one by the manufacturer? In this case, you may assume all outputs are sold. Explain your choice. [Ans: Location A, highest profit margin] b) How much location A, B and C will have to produce in order to gain profit of RM50,000. [Ans: 11,333(A), 13,750(B), 15,500(C) ] KKP is responsible in producing cooking oil for export. For future expansion, it has the alternative to choose from three possible production sites, A, B and C that have the following cost structure: Sites A B C Fixed Cost / year 100,000 80,000 75,000 Variable Costs/ Tonne 25 40 50

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a) If KKP wants to produce 10,000 tons of cooking oil this year, which is the most attractive site? [Ans: site A] b) How many tons of cooking oil per year must be sold from each production site if KKP were to have annual profits of RM40,000 if the selling price is RM60 per ton? [Ans: 4,000tons(A); 6,000 tons(B); 11,500(C)] A company X plans to produce 30,000 units next year. They will sell for RM700 each. The fixed costs of operation are RM5 million and total variable costs are RM6 million. What would be its break-even point if the company chooses this location? [Ans:15,714 units] Company WWWE has annual fixed costs of RM6.4 million and variable costs of RM14 per unit. It is considering an additional investment of RM1.6 million that will increase the fixed costs by RM300,000 per year and decreases variable costs by RM4 per unit. No change is anticipated in the sales volume or the sales price of RM30 per unit. What is the change in break-even quantity if the new investment is made? [Ans: reduced 65,000 units to 335,000 units]