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Windcheater Roofracks Expansion Options

Option 1 would double the company's output capacity to 10,000 units per year by extending the existing premises, increasing fixed costs by $27,000 but keeping direct costs the same. Option 2 would increase output capacity by 50% to 7,500 units per year by purchasing new machinery to speed up production and reduce waste, raising fixed costs by $6,000 but lowering direct costs by $2 per unit. The owner must choose between these two expansion options to meet growing demand from retailers.

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Hala Balbeisi
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79 views1 page

Windcheater Roofracks Expansion Options

Option 1 would double the company's output capacity to 10,000 units per year by extending the existing premises, increasing fixed costs by $27,000 but keeping direct costs the same. Option 2 would increase output capacity by 50% to 7,500 units per year by purchasing new machinery to speed up production and reduce waste, raising fixed costs by $6,000 but lowering direct costs by $2 per unit. The owner must choose between these two expansion options to meet growing demand from retailers.

Uploaded by

Hala Balbeisi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Q1) WINDCHEATER CAR ROOFRACKS

The sole owner of Windcheater Car Roofracks needs to expand output as a result of
increasing demand from motor accessory shops. The business uses batch production
to produce its roofracks. Current output capacity has been reached at 5000 units per
year. Each rack is sold to the retailers for $40. Production costs are:
- Direct labour $10
- Direct material $12
- Fixed costs $54 000

The owner is considering two options for expansion:


Option 1 Extend the existing premises, but keep the same method of production.
This would increase fixed costs by $27 000 per year, but direct costs would remain
unchanged. Capacity would be doubled.
Option 2 Purchase new machinery which will speed up the production process and
cut down on wasted materials. Fixed costs would rise by $6000 per year, but direct
costs would be reduced by $2 per unit. Output capacity would increase by 50%.

a) Define the following terms from the text:


i. Overdrafts
ii. Fixed cost
(4 marks)

b) Draw a break even chart for Options 1 and 2 and show the breakeven points
for each option.
(10 marks)

c) On the basis of your break-even charts, explain which option Windcheater


should choose.
(4 marks)

d) Evaluate the usefulness of break-even analysis to businesses like


Windcheater.
(6 marks)

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