A division of Hewlett-Packard Company changedits production operations from one where a large labor forceassembled electronic components to an automated production facilitydominated by computer-controlled robots. The change was necessarybecause of fierce competitive pressures. Improvements in quality,reliability, and flexibility of production schedules were necessaryjust to match the competition. As a result of the change, variablecosts fell and fixed costs increased, as shown in the followingassumed 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 600,000units 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 productionenvironments.
5. Comment on the riskiness of the new operation versus the oldoperation.