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26 March, 14:13

A product is currently made in a process-focused shop, where fixed costs are $8,000 per year and variable cost is $40 per unit. The firm currently sells 200 units of the product at $200 per unit. A manager is considering a repetitive focus to lower costs (and lower prices, thus raising demand). The costs of this proposed shop are fixed costs = $24,000 per year and variable cost = $10 per unit. If a price of $80 will allow 400 units to be sold, what profit (or loss) can this proposed new process expect? Do you anticipate that the manager will want to change the process? Explain.

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  1. 26 March, 16:15
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    It will not proceed with the changes as it decreases the operating profit by 20,000.

    Explanation:

    current scenario:

    contribution per unit:

    200 selling price - 40 variable cost = 160

    Then 200 x 160 - 200 = 24,000 operating income

    proposed change in the process:

    contribution per unit

    80 selling price - 10 cost per untit = 70 per unit

    Then 400 x 70 - 24,000 = 4,000

    It will not proceed with the changes as it decreases the operating profit by 20,000.
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