De Leon, Bianca Mhae V.

FM-331

Assignment on Capacity Planning

A firm is considering three capacity alternatives: A, B, C. Alternative A would have an annual fixed cost of
Php 100,000 and variable cost of Php22 per unit. Alternative B annual fixed cost is 120,000 and variable
cost is 20 per unit. On the other hand, alternative C fixed cost is 80,000 with a variable cost of 30 per unit.
Revenue is expected to be50 per unit.

1. Which alternative has the lowest break-even point?

Alternative A has the lowest BEP

ALT FC VC R

A 100 000 22 50

B 120 000 20 50

C 80 000 30 50
BEP (AltA) = 100,000/50-22 = 3,571.43 units
(lowest)
BEP (AltB) = 120,000/50-20 = 4,000 units

BEP (AltC) = 80,000/50-30 = 4,000 units

2. Which alternative will produce the highest profits for an annual output of 10,000 units?

Alternative A & B produce the highest profits

Q = 10,000 units
TPa = 10,000 (50-22) - 100,000 = 180,000
TPb = 10,000 (50-20) - 120,000 = 180,000
TPc = 10,000 (50-30) - 80,000 = 120,000

3. Which alternative will require the lowest volume of output to generate an annual profit of Php
50,000?
Alternative A will require the lowest volume which is 5,357 units to generate an annual profit of ₱50,000.00.
x = (P +FC)/(SP-VC) or P = Q(SP-VC) - FC

Solution here ------

Alternative A 50,000 = Q(50-22) - 100,000

= 50,000 = - 100,000
Q(28)
100,000 = 28Q
= 50,000 +
Q
= 150,000 =
28 = 5,357.14 or 5,357 units
Q=
150,000/28

Alternative B 50,000 = Q(50-20) - 120,000

= 50,000 = Q(30) - 120,000
= 50,000+120,000 = 30Q
= 170,000 = 30Q
Q = 170,000/30 = 5,666.66 or 5,667 units

Alternative C 50,000 = Q(50-30) -80,000

= 130,000 = 20Q
Q = 130,000/20 = 6,500 units
4. At what volume of output would the three alternatives yield the same profit?

For the three alternatives to yield the same profit, the volume of the output should be 2,727 units.

Alternative A = Alternative B = Alternative C

Q(50-22)-100,000 = Q(50-20) -120,000 = Q(50-30) -
80,000 28Q-100,000 = 30Q-120,000 = 20Q-80,000
-2Q -20,000 = 20Q - 80,000
-22Q -20,000 = -80,000
-22Q = -80,000 + 20,000
-22Q = -60,000
Q = -60,000/-22 = 2,727.27 or 2,727 units