Sheila, the plant manager of a metal stamping operation in Wisconsin, is considering upgrading her operations. While the business is making modest profits now, she suspects that if the firm invests in a new forming press, it could recognize a substantial increase in profits. The new press costs $137,400 to purchase and install and can press 110 parts per hour (or 880 per day). Sheila estimates that with
the new press, it will cost $3.70 to press each part. Customers are charged $5.95 per unit.
a. How many parts will Sheila’s operation have to produce to break even? What level of sales revenues would be required?
b. So far, the plant’s workload has varied from 300 to 600 units each day. How long would it take to break even on the new press at the low-demand estimate? How long at the high- demand estimate?
c. If the Sales department cuts the price per unit to $5.50, management expects that demand will stabilize at 800 units per day. What is the breakeven point at the new price? How much revenue would be required to break even? How long would it take to break even at the reduced price of $5.50?
d. As the Chief Operating Officer, would you buy the new press and order the price reduction?
Explain your rationale.