A division of HP Company changed its production operation from one where a large labor force assembled electronic components to an automated production facility dominated by computers controllers robot. The change was necessary because of fierce competitive pressures Improvement in quality, reliability and flexibility of production schedule were necessary just to match the competititon. As a results of the change, variable cost fell and fixed costs increased as shown in the following assumed budget
Old prod operation New production
Unit variable cost
Material .88 .88
Labor 1.22 .22
Total per unit 2.10 1.10
Montly fixed cost
Rent and depreciation 450.000 875.000
Supervisor labor 80.000 175.000
Other 50.000 90.000
Total per month 580.000 1.140.000
Expected volume is 600.000 units per month with each unit selling for 3.10. Capacity is 800.000 units
1. Compute the budgeted profit at the expected volume of 600.000 units under both the old and the new product
2. Compute the budgeted break-even points under both the old and the new production
3. Discuss the effect on profits if volume falls to 500.000 units under both the old and the production environment
4. Discuss the effecr on profits if volume increases to 700.000 units under both the old and the new production environment
5. Comment on the reskiness of the new operation versus the old operation