Which machine will maximize their profit if the manufacturer anticipates market demand will be steady for 3 years and there is no residual value for any of the equipment choices?

A manufacturer has a forecasted annual demand of 1,000,000 units for a new product. They have to choose 1 of 4 new pieces of equipment to produce this product. Assume that revenue will be $10 per unit for all 4 options.

Which machine will maximize their profit if the manufacturer anticipates market demand will be steady for 3 years and there is no residual value for any of the equipment choices?

MachineFixed CostVariable Cost per UnitAnnual Capacity

AS100.000$6 00800,000 units

B$200,000$5 501.000,000 units

C$250,000$5 001,200,000 units

D$1000.000$4 501 400.000 units
A . Machine A
B . Machine B
C . Machine C
D . Machine D

View Answer

Answer: C

Explanation:

To maximize profit, the manufacturer should choose the machine that has the lowest total cost per unit of demand. The total cost per unit of demand is calculated by adding the fixed cost per unit of demand and the variable cost per unit. The fixed cost per unit of demand is obtained by dividing the fixed cost by the annual demand. The variable cost per unit is given in the table.

The total cost per unit of demand for each machine is:

Machine A: 1,000,000100,000+6.00=6.10

Machine B: 1,000,000200,000+5.50=5.70

Machine C: 1,000,000250,000+5.00=5.25

Machine D: 1,000,0001,000,000+4.50=5.50

The lowest total cost per unit of demand is for Machine C, which is $5.25. Therefore, Machine C will maximize the profit for the manufacturer.

References:

Some possible references for this question are:

CPIM Part 1 Exam Content Manual, Version 8.0, Domain 3: Plan and Manage Supply, Section A: Plan

and Manage Supply Chain Capacity, Topic 2: Capacity Planning Concepts, Subtopic b: Capacity planning methods, Page 30

CPIM Part 1 Learning System, Version 8.0, Module 3: Plan and Manage Supply, Section 3.2: Capacity Planning Concepts, Topic 3.2.2: Capacity Planning Methods, Subtopic 3.2.2.2: Cost-Volume Analysis, Pages 3-24 to 3-26

CPIM Part 1 Study Guide, Version 8.0, Module 3: Plan and Manage Supply, Section 3.2: Capacity Planning Concepts, Topic 3.2.2: Capacity Planning Methods, Subtopic 3.2.2.2: Cost-Volume Analysis, Pages 3-24 to 3-26