Question 3

The problem that one has before them here is to determine the total costs,

revenues, and profits or losses that are applicable to the information presented for

the Rolling Creek Textile Mill. A secondary part of the problem shown below

asks one to determine the break-even quantity for the number of tires that they

need to produce to break even. Shown below are the two (2) parts of the question

that one must answer in order to get a proper solution to the problem here.

(a)

The first part of the problem that one would need to solve here is to determine the

applicable values for 18,000 yards of denim to be sold in an average year. Note

that the author mentions in the text a specific formula that one would need to use

in order to determine the values required here. To get things going here, this is

stated below with the applicable variable definitions:

 ….. (1)

Where,

- Z = the total profit or loss for a specified volume of units,

- v = the amount of volume that is examined in the equation,

- p =  the price of one unit that is being measured here,

- cf = the sum of fixed costs for the units produced, and

- cv =  the sum of variable costs for the units produced.

Though this looks like a daunting problem and disgusting formula to have to work

through, it really isn’t all that hard once one knows what is going on. From the
problem’s text, we know that the fixed costs are $21,000.00 and variable costs are

approximately $0.45 per yard of denim while the revenues generated per tire are

$1.30 per yard. With the assumption that we have 18,000 yards of denim sold and

produced in an average year, all it takes is plugging in the numbers and seeing

what we would end up with as a profit or loss value. These calculations are shown

below for one to see:

Z = - $5,700.00 (loss)

As of a result, the net profit from the production volume, revenues that are

projected for each yard of denim and fixed and variable cost assumptions, the

company would net a loss of $5,700.00 based on 18,000 yards of denim produced

and sold in an average year. We can now turn ourselves to the second question

which is another critical element to the concept of management science which is

in this case a little more unique given the circumstances at hand.

(b)

The second part of the problem that the author wants one to look at has to do with

finding the yearly break even volume required in order for the company to meet

revenues with equal expenses. Remember in this situation, the goal here is to have
any net profit or loss equal to zero. Thus, the formula is a little bit different than

what is was above and is shown below to continue along with the problem at

hand:

 ….. (2)

Where,

- v = the amount of volume that is examined in the equation,

- p =  the price of one unit that is being measured here,

- cf = the sum of fixed costs for the units produced, and

- cv =  the sum of variable costs for the units produced.

Since we already know the values from the previous part of the problem above, it

is a simple fractional equation that has to be solved here. The calculations are

shown below for one to see as well as the answer:

v = 24,705.88 yards of denim per year

Question 9

In order to achieve a break even status, the textile mill company would need to

sell 24,705.88 yards of denim a year in order for any revenues to meet expenses.
Note that this is well above the forecasted volume of 18,000 yards per year that

they felt would be good enough to produce and make a profit. This can raise a

number of managerial questions as to the effectiveness of materials and labor

used, efficiencies that can be realized, and other related factors. This is something

to keep in mind when looking at problems like this and a deficit is presented.