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Cost analysis and Estimation
11. Breakeven Analysis. The Truck Stop is a repair facility specializing in the maintenance and repair of diesel engines just outside of Carlisle, Pennsylvania–one of the largest trucking hubs in the U.S. The business manager of the Truck Stop has been asked by the owners to prepare a financial analysis of the potential of a 24-hour repair operation. Opening such a center would require remodeling the facility and the hiring of some additional staff. Estimated first year expenses for the Truck Stop’s diesel service center are:
Support staff salary expense $ 15,000Mechanic Salary expense 80,000Supplies 4,000Equipment 5,000Remodeling 10,000Electricity, heat, and taxes 8,000Total expenses $122,000
Mechanic and staff salary expenses are estimated on an hourly basis, reflecting additional salary and overtime costs. Supplies and remodeling expenses are above and beyond those required for normal facility operations. Equipment costs represent a prorated share of the centers fixed equipment-leasing costs. Electricity costs of $2,000 reflect additional anticipated usage, whereas heat and taxes of $6,000 reflect an allocated share of fixed expenses.
Please Calculate breakeven revenue for the Truck Stop’s proposed 24-hour diesel service center.
12. Profit Contribution Analysis. Kathy’s Bakery is a local full-service bakery in Omaha, Nebraska. Kathy sells loaves of wheat bread for $3 a loaf. Of this amount, $1.50 is profit contribution. She is considering an attempt to differentiate her shop from several other competitors by only producing a special rice bread for customers allergic to wheat. Doing so would increase her unit cost by 50¢ per rice loaf. Current monthly profits are $400 on 800 unit sales.
A. Assuming average variable costs are constant at all output levels, what is Kathy’s total cost function before the proposed change?
B. What will the total cost function be if rice loafs are produced?
C. Assume rice loaf prices remain stable at $3. What percentage increase in sales would be necessary to maintain current profit levels?
13. Multiplant Operation. Nature’s Green, Inc., a manufacturer of alfalfa tablets sold in health-food stores, currently operates just outside of Meno, California. Nature’s Green is considering two alternative proposals for expansion, because it has run out of acreage to grow its organically-farmed alfalfa. It has found the following sites where farmers are willing to supply organic alfalfa: Alternative 1: Construct a single plant in Big Cabin, Oklahoma with a monthly production capacity of 50,000 cases, a monthly fixed cost of $275,000, and a variable cost of $100 per case. Alternative 2: Construct three plants, one each in Eudora, Kansas, Springfield, Missouri, and Tonkawa, Oklahoma, with capacities of 25,000, 20,000 and 15,000, respectively, and monthly fixed costs of $200,000, $175,000, and $160,000 each. Variable costs would be only $95 per case because of lower distribution costs. To achieve these cost savings, sales from each smaller plant would be limited to demand within its home state. The total estimated monthly sales volume of 49,000 cases in these three southeastern states is distributed as follows: 20,000 cases in Kansas, 15,000 cases in Missouri, and 14,000 cases in Oklahoma.
A. Assuming a wholesale price of $120 per case, calculate the breakeven output quantities for each alternative.
B. Assuming sales at the projected levels, which alternative expansion scheme provides Nature’s Green with the highest profit per month?
C. If sales increase to production capacities, which alternative would prove to be more profitable?
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