Question
Johnson Limited manufactures and sells highly faddish products directed toward the preteen market. A new product has come onto the market that the company is
Johnson Limited manufactures and sells highly faddish products directed toward the preteen market. A new product has come onto the market that the company is anxious to manufacture and sell. Enough capacity exists in the company's plant to manufacture a maximum of 35,000 units of the new product each month. Total fixed costs (both manufacturing and non-manufacturing) will amount to $60,000 per month. The company's controller projects an operating loss of $15,000 if the company manufactures and sells 30,000 units of the new product per month.
The marketing department predicts that demand for the new product will exceed the maximum 35,000 units that the company is able to manufacture in its own plant. Additional manufacturing capacity can be rented from another company at a fixed cost of $20,000 per month to manufacture 50,000 units of the new product monthly. The variable costs to manufacture and sell units of the new product made in the rented facility will be higher at $3.75, due to somewhat less efficient operations than in the company's own plant. The new product, however, will sell for $4.50 per unit, regardless of where it is manufactured.
c) Suppose there are NO manufacturing capacity constraints for the manufacture of the new product at either the company's own plant or the rented facility. At what level of non-zero production and sales (in units) would you expect the company to be indifferent between the two manufacturing facilities?
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