Problem:
If I sell a component for $20 each. Current capacity is 10,000 units per week. For the last few months, however, my company has been receiving new orders at a rate of 14,000 units per week, and now has a substantial backlog. I expected this order rate to continue, if I maintains my current price. Current operating data follows:
Sales Revenue $200,000
Variable Costs $100,000
Fixed Costs $80,000
Pre-tax Profit $20,000
For each incremental addition of 500 units of output weekly, I would need to purchase new equipment that would add $1,500 to weekly fixed costs. No other fixed costs would become incremental for this price change. Labor costs currently account for half of all variable costs. Additional hires, however, are expected to be more costly than the average of current employees because of their lower productivity. Consequently, labor costs for additional output with new hires is 20% higher than the current average.
How much would my weekly profits increase if it expanded to meet the entire amount of my current excess demand?