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COST-VOLUME-PROFIT MODEL

Eagle Cleaners is opening a new location for its new cleaning services operation. They estimate the demand to be 11000 garments a month. Each garment cleaned will leave a revenue of $45. They are considering leasing cleaning machines to satisfy the demand. The table below provides information on the leasing cost per machine per month as well as the capacity levels.

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Machines

Leasing Cost / Month

Cost per Garment Cleaned

Capacity (garments per month)

A

$350,000

$5

11,500

B

$170,000

$25

10,500

C

$100,000

$40

12,000

D

$250,000

$20

12,500

  1. (3 points) Compute the break-even point for each machine in production volume (number of garments that should be cleaned), separately.

  1. (5 points) Which production volume range is the best for the company? Explain clearly why. Please take into account the opportunity cost of not meeting the demand, in addition to other factors. Clearly discuss how you determine the “best” option. Which machine do you recommend for the company to lease?

  2. (3 points) Suppose the company chooses the machine that you recommended in part b.

  • What will be the capacity cushion (in number of garments) if the company produces as much as the forecasted demand?

  • What is the capacity cushion as a percentage of the production capacity in that case?

  • What is the implied capacity utilization if the company’s demand goes up to 12,000 (i.e., the capacity utilization when the company must clean garments as much as the demand)?


 
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