Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

ABC Company is the manufacturer of a low-noise air-purification system. Its current capacity is 10,000 units/month, but ABC received orders totaling 9,000 units each month.

ABC Company is the manufacturer of a low-noise air-purification system. Its current capacity is 10,000 units/month, but ABC received orders totaling 9,000 units each month. Currently, ABC sells its system at a price of $200 per unit, its fixed cost is $500,000/month, and its variable cost is $100/unit. Note that currently, half of ABCs variable cost is materials, and the other half is labor cost (wages for workers). ABC wants to consider cutting its price by 10% to stimulate demand. If ABC expands its capacity, it will have to lease additional manufacturing machines, each of which will cost $20,000/month to lease and can add 1000 units to ABCs capacity. All existing workers are already working full-time. So, if ABC expands production, ABC has to either pay existing employees for overtime (1.5 times the regular wages) or hire new workers, who are expected to be paid 90% of the hourly wage of existing workers but produce only 75% of the hourly output of existing workers.

What are the incremental breakeven unit sales for the 10% price cut? If ABCs monthly order is estimated to increase by no more than 24% after the 10% price cut, should ABC implement the price cut?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Stocks Bonds And The Investment Horizon

Authors: Haim Levy

1st Edition

9811250146, 978-9811250149

More Books

Students also viewed these Finance questions

Question

Explain the serial-position curve and why it occurs.

Answered: 1 week ago

Question

Language in Context?

Answered: 1 week ago