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 Php 22 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 be 50 per unit.

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

Solution here:

ALTERNATIVE A
Fixed Cost = Php100,000
Variable Cost = 22 per unit
Revenue = 50 per unit
BEPx = FC/(SP-VC)
=100,000/(50-22)
=100,000/(28)
=3,571.43 units

ALTERNATIVE B
Fixed Cost = Php120,000
Variable Cost = 20 per unit
Revenue = 50 per unit
BEPx = FC/(SP-VC)
=120,000/(50-20)
=120,000/(30)
=4,000 units

ALTERNATIVE C
Fixed Cost = Php80,000
Variable Cost = 30 per unit
Revenue = 50 per unit
BEPx = FC/(SP-VC)
=80,000/(50-30)
=80,000/(20)
=4,000 units

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

Solution here:
ALTERNATIVE A
Fixed Cost = Php100,000
Variable Cost = 22 per unit
Revenue = 50 per unit
Profit = (SP x No. of Units) –FC – (VC – No. of Units)
= (50 x 10,000) –
100,000 – (22 x 10,000)
= Php 180,000

ALTERNATIVE B
Fixed Cost = Php120,000
Variable Cost = 20 per unit
Revenue = 50 per unit
Profit = (SP x No. of Units) – FC – (VC – No. of Units)
= (50 x 10,000) – 120,000 – (20 x 10,000)
= Php 180,000

ALTERNATIVE C
Fixed Cost = Php80,000
Variable Cost = 30 per unit
Revenue = 50 per unit
Profit = (SP x No. of Units) – FC – (VC – No. of Units)
= (50 x 10,000) – 80,000 – (30 x 10,000)
= Php 120,000

3. Which alternative will require the lowest volume of output to generate an annual profit of Php
50,000? Alternative A.

Solution here:

ALTERNATIVE A
Fixed Cost = Php100,000
Variable Cost = 22 per unit
Revenue = 50 per unit
= SP + FC / REV - VC
= 50,000 + 100,000 / 50 - 22
= 5,357.14

ALTERNATIVE B
Fixed Cost = Php120,000
Variable Cost = 20 per unit
Revenue = 50 per unit
= SP + FC / REV - VC
= 50,000 + 120,000 / 50 - 20
= 5,666.67

ALTERNATIVE C
Fixed Cost = Php80,000
Variable Cost = 30 per unit
Revenue = 50 per unit
= SP + FC / REV - VC
= 50,000 + 80,000 / 50 - 30
= 6,500

4. At what volume of output would the three alternatives yield the same profit?

Solution here:

Q = output
R = revenue per unit
VC = variable cost per unit
FC = fixed cost
PROFIT A = PROFIT B

Q(50-22) – 100,000 = Q(50-20) – 120,000

28Q – 100,000 = 30Q – 120,000
2Q = 120,000 – 100,000
2Q = 20,000
Q = 10,000
Both Alternative A and Alternative B will retain their number of outputs, which is 10,000.
PROFIT C

P = Q(R-VC) – FC
180,000 = Q(50-30) – 80,000
180,000 + 80,000 = 20Q
260,000 = 20Q
Q = 13,000

Alternative C has to increase their number of outputs from 10,000 to 13,000 in order to yield the
same profit with Alternative A and Alternative B.