Question

Boyer Inc. is considering the introduction of a new product. This product can be manufactured in one of several ways: Using the present system at a variable cost of $55 per unit and a one time cost of $15,500. They can upgrade the present system, which will have a variable cost of $48.00 per unit, and an initial cost of $27,200. That last option consists of adding a new system with a per unit variable cost of $25.00, and an initial cost of $45,000. The organization is worried however, about the impact of competition. If no competition occurs, they expect manufacture 4,500, 6,800, and 8,800 units respectively. With competition, they expect to manufacture: 3,750, 5,500, and 6,700 units respectively. At the moment their best estimate is that there is a 57% chance of competition. They decided to make their decision based on manufacturing cost for each alternative. Based on evaluating cost, determine the following: a. What is the EMV for using the present system

Answer 1

The EMV (Expected Monetary Value) of using the present system with a variable cost of $55 per unit and a fixed cost of $15,500 is $239,515.

Data and Calculations:

                                         Present      New System 1     New System 2

Variable cost per unit         $55                  $48                     $25

Fixed cost                       $15,500           $27,200             $45,000

Production units:

 Without competition       4,500                6,800                  8,800

 With competition            3,750                 5,500                  6,700

Probability of competition   57%                  57%                     57%

Probability: no competition 43%                  43%                    43% (100 -57)

Expected production units:

Present System = 4,073 units (3,750 x 57%) + (4,500 x 43%)

Expected monetary value of present system:

Variable cost = $224,015 (4,073 x $55)

Fixed costs =      $15,500

Total EMV =     $239,515

• Cost per unit = $58.81 ($239,515/4,073)

Expected production units:

New System 1 = 6,059 units (5,500 x 57%) + (6,800 x 43%)

Expected monetary value of present system:

Variable cost = $290,832 (6,059 x $48)

Fixed costs =      $27,200

Total EMV =     $318,032

• Cost per unit = $52.49 ($318,032/6,059)

Expected production units:

New System 2 = 7,603 units (6,700 x 57%) + (8,800 x 43%)

Expected monetary value of present system:

Variable cost =  $190,075 (7,603 x $25)

Fixed costs =      $45,000

Total EMV =     $235,075

• Cost per unit = $30.92 ($235,075/7,603)

Thus, the EMV for using the present system is $239,515.

Read more about EMV at brainly.com/question/17056362