A division of Hewlett-Packard Company changedits production operations from one where a large labor force assembled electronic components to an automated production facility dominated by computer-controlled robots. The change was necessary because of fierce competitive pressures. Improvements in quality, reliability, and flexibility of production schedules were necessary just to match the competition. As a result of the change, variable costs fell and fixed costs increased, as shown in the following assumed budgets:
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Old Production Operation
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New Production Operation
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Unit Variable Cost
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|
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Material
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$ .88
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$ .88
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Labor
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$1.22
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$.22
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Total per unit
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$2.10
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$1.10
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Monthly Fixed Costs
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|
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Rent and depreciation
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$450,000
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$875,000
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Supervisory labor
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80,000
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175,000
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Other
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50,000
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90,000
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Total per month
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$580,000
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$1,140,000
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Expected volume is 600,000 units per month, with each unitselling for $3.10. Capacity is 800,000 units.
1. Compute the budgeted profit at the expected volume of 600,000 units under both the old and the new production environments.
2. Compute the budgeted break-even point under both the old andthe new production environments.
3. Discuss the effect on profits if volume falls to 500,000units under both the old and the new production environments.
4. Discuss the effect has on profits if volume increases to700,000 units under both the old and the new production environments.
5. Comment on the riskiness of the new operation versus the old operation.