Assignment:
Sheila, the plant manager of a metal stamping operation in Wisconsin, is considering changes to 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 $249,000 to purchase and install and can press 125 parts per hour (or 1000 per day). Sheila estimates that with the new press, it will cost $2.95 to press each part. Customers are charged $4.80 per unit.
a. How many parts will Sheila's operation have to produce to break even? What level of sales revenues would be required? (Calculations are sufficient.)
b. So far, the plant's workload has varied from 350 to 650 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? (Calculations are sufficient.)
c. If the Sales department cuts the price per unit to $4.45, management expects that demand will stabilize at 950 units per day. What is the break even 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 $4.45? (Calculations are sufficient.)
d. Compare and contrast the scenario described under Parts a & b to the scenario outlined in Part c. As the VP of Operations, would you buy the new press and order the price reduction based on these calculations? Explain your rationale.