Question

Zan Azlett and Angela Zesiger have joined forces to start​ A&Z Lettuce​ Products, a processor of packaged shredded lettuce for institutional use. Zan has years of food processing​ experience, and Angela has extensive commercial food preparation experience. The process will consist of opening crates of lettuce and then​ sorting, washing,​ slicing, preserving, and finally packaging the prepared lettuce.​ Together, with help from​ vendors, they think they can adequately estimate​ demand, fixed​ costs, revenues, and variable cost per bag of lettuce. They think a largely manual process will have monthly fixed costs of $ 37, 500 and variable costs of $ 1.60 per bag. A more mechanized process will have fixed costs of $ 72,000 per month with variable costs of $ 1.00 per bag. They expect to sell the shredded lettuce for $ 3.00 per bag. ​
a) The​ break-even quantity in units for the manual process​ =________________ bags ​(round your response to the nearest whole​ number).

​b) The revenue for the manual process at the​ break-even quantity​ = ​$ ________________ ​(round your response to the nearest whole​ number). ​

c) The​ break-even quantity in units for the mechanized process​ = ________________ bags ​(round your response to the nearest whole​ number).

​d) The revenue for the mechanized process at the​ break-even quantity​ = ​$ ________________ ​(round your response to the nearest whole​ number).

​e) For monthly sales of 65,000 ​bags, for the option with manual​ processing, A&Z Lettuce Products will have a profit of ​$ nothing ​(round your response to the nearest whole number and include a minus sign if the profit is​ negative).

​f) For monthly sales of 65,000 ​bags, for the option with mechanized​ processing, A&Z Lettuce Products will have a profit of ​$ ________________ ​(round your response to the nearest whole number and include a minus sign if the profit is​ negative).

​g) The quantity at which Zan and Angela are going to be indifferent between the manual and mechanized process​ = ________________ bags ​(round your response to the nearest whole​ number). ​

h) If the demand exceeds the point of​ indifference, then Zan and Angela should prefer the option with ________________. If the demand stays below the point of​ indifference, then Zan and Angela should prefer the option with ________________

Answer 1

Answer:

a. The​ break-even quantity in units for manual process= 26,786 bags

b. $80,358

c. 36,000 bags

d. $108,000

e. $53,000

f. $58,000

g. 26,786 bags

h. mechanized process, manual process.

Explanation:

a. Using the formula

Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

= $ 37, 500÷$3- $ 1.60

=26,786

b. Using the formula

Break-Even Point (sales dollars) = Fixed Costs ÷ Contribution Margin

where Contribution Margin = Price of Product – Variable Costs

=37, 500÷($3- $ 1.60)

=26,786 x $3= $80,358

c. Using the formula

Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

= $ 72,000÷$3- $1

=36,000 bags

d. Using the formula

Fixed Costs ÷ Contribution Margin

where Contribution Margin = Price of Product – Variable Costs

= $ 72,000÷($3- $1)

=36,000 bags x $3= $108,000

e. 65,000 bags x $3-$1.60= $91,000-$37,500 (manual process fixed cost)

= $53,000

f. 65,000 bags x $3-$1= $130,000-$72,000 (manual process fixed cost)

= $58,000

h. The mechanized process option should be chosen as this would bring more returns if the demand exceeds the point of​ indifference and the manual process if the demand stays below the point of​ indifference.