Hugh Leach Corp., a producer of machine tools, wants to move to a larger site.

Question

Hugh Leach Corp., a producer of machine tools, wants to move to a larger site. Two alternative locations have been identified: Bonham and McKinney. Bonham would have fixed costs of $800,000 per year and variable costs of $14,000 per standard unit produced. McKinney would have annual fixed costs of $920,000 and variable costs of $13,000 per standard unit. The finished items sell for $29,000 each.

a) At what volume of output would the two locations have the same profit?

(b) For what range of output would Bonham be superior (have higher profits)?

(c) For what range would McKinney be superior?

(d) What is the relevance of break-even points for these cities?

Answer 1

To find the number of units sold that would give the same profit for each location, you would use the formula 800,000 + 14,000X = 920,000 + 13,000X (X = number of units sold).  Now solve for X.  Subtract 800,000 and 13,000X froma both sides, giving you 1000 X = 120,000.  X = 120 units sold.

 

Bonham would have greater profits when selling less than 120 units.

 

McKinney would have greater profits when selling more than 120 units.

 

The break even for Bonham is 53.3 units, and for McKinney it is 57.5 units.  Since the difference in units sold for the two locations is minimal, I believe break even is of little relevance when chosing which city to build the new facility.

 

Bonham break even formula 29,000X - 14,000X - 800,000 = 0; 15,000X = 800,000.  Divide both sides by 15,000, resulting in X = 53.3.

 

McKinney break even formula 29,000X - 13,000X - 920,000 = 0; 16,000X = 920,000.  Divide both sides by 16,000, resulting in X= 57.5.