Compute the variable cost, Cost Accounting

A soft drink maker wants to expand into a neighboring country.  They want the product bottled in that country to avoid political issues and to enhance the local image of the product.  They have identified two options for the expansion.  The first is to build a highly automated plant.  The economies of scale would allow them to produce a can of soda for $0.04 and the distribution costs would be $0.02 per can.  This facility would cost $1 million per year in fixed costs.  The second option would be to build a semi-automated plant that would cost $650,000 per year in fixed costs.  However, the cost to produce a can would be $0.07 and the distribution cost would be $0.04 per can.

a) Over what range of product would each plant be preferred?

b)  Suppose the company believes that the demand would be approximately 6,000,000 cans per year.  Suppose all costs except the variable cost (sum of the production and distribution costs) for the highly automated process are certain and can not change.  What would the variable cost (the sum of the production and distribution cost) per can for the highly automated process have to be so that the soft drinker maker is indifferent between the two types of plants?

c)  Now suppose each alternative has a different capacity.  The total estimated demand for the year is 5,000,000 if the company sells each can for $0.32.  However, only the highly automated process can produce and distribute this amount.  If the semi-automated process is used, the company would only be able to produce and distribute 4,200,000 cans annually.  To offset the lower volume, the company will raise the price of each can to $0.35.  It will be able to sell all it produces at this price.  Using all of the information presented in the problem, which process should it use?  Why?

Posted Date: 2/18/2013 12:37:49 AM | Location : United States

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