Assignment:
Breakeven, Expected Value and Indifference Point
Kimberly Clark in Neenah, WI manufactures paper towels and sells them for $1.00 per roll. The company's variable cost is $0.20 per roll. The Neenahlocation has a fixed cost of $25,000 (rent, utilities, taxes, etc.) per month. Kimberly Clark's marketing department has estimated the following demand scenarios and probability of each level of demand for March, 2017.
|
Demand Level
|
Rolls of Paper Towels Sold
|
Probability
|
|
Low Demand
|
1,500,000
|
30%
|
|
Medium Demand
|
5,000,000
|
50%
|
|
High Demand
|
12,000,000
|
20%
|
a) How many paper towels does Kimberly Clark need to sell each month to break even?
b) What is Kimberly Clark's total monthly cost (fixed plus variable) if there is low demand for paper towels in March?
c) What is the expected value of Kimberly Clark's cost to make paper towels in March?
d) The company is considering moving to a new location in Eau Claire, WI that has a fixed cost of $20,000 per month, but variable costs to produce paper towels would by $0.22 per roll at this new location. At what output level would Kimberly Clark be indifferent between its Neenahlocation and the Eau Clairelocation?
e) Based on your answer from part d and the forecast for March, should Kimberly Clark move to the Eau Clairelocation