A division of Hewlett-Packard Company changed its 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:
Old Production Operation New Production Operation
Unit variable cost
Material $ .88 $ .88
Labor 1.22 .22
Total per unit $ 2.10 $ 1.10
Monthly fixed costs
Rent and depreciation $450,000 $ 875,000
Supervisory labor 80,000 175,000
Other 50,000 90,000
Total per month $580,000 $1,140,000
Expected volume is 600,000 units per month, with each unit selling 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 and the new production environments.
3. Discuss the effect on profits if volume falls to 500,000 units under both the old and the new production environments.
4. Discuss the effect on profits if volume increases to 700,000 units under both the old and the new production environments.
5. Comment on the riskiness of the new operation versus the old operation.