Having been in a good business for years, a bakery shop is now considering an upgrade
Having been in a good business for years, a bakery shop is now considering an upgrade. Currently, the shop mainly operates manual processes with only $1, 500 fixed cost a year and $40 for each cake it produces. Hilda, the owner is reviewing two alternatives: semi-automatic and full-automatic equipment. Semi-automatic equipment can lower down the cost to only $25 a cake at $6,000 fixed cost a year. Using full-automatic equipment can reduce the cost significantly to $12 a cake. However, the fixed cost will increase to $15,000 a year. a. Which alternative should Hilda choose? b. Draw the graph to illustrate this situation
Expert Answer
Assume that the bakery shop produces x number of cakes in a year
Total cost in current situation,
Don't use plagiarized sources. Get Your Custom Essay on
Having been in a good business for years, a bakery shop is now considering an upgrade
Get an essay WRITTEN FOR YOU, Plagiarism free, and by an EXPERT!
Total cost = fixed cost + variable cost
= fixed cost + (cost for each cake * no. of cakes produced)
= $1,500 + $40 * x
Total cost of semi-automatic situation,
Total cost = fixed cost + variable cost
= fixed cost + (cost for each cake * no. of cakes produced)
= $6,000 + $25 * x
Total cost of full-automatic situation,
Total cost = fixed cost + variable cost
= fixed cost + (cost for each cake * no. of cakes produced)
= $15,000 + $12 * x
Let’s calculate total cost of production by assuming number for x
| No. of cakes produced in a year (x) | Total cost under current situation | Total cost under semi-automatic situation | Total cost under full-automatic situation |
| 100 | 5500 | 8500 | 16200 |
| 200 | 9500 | 11000 | 17400 |
| 300 | 13500 | 13500 | 18600 |
| 400 | 17500 | 16000 | 19800 |
| 500 | 21500 | 18500 | 21000 |
| 600 | 25500 | 21000 | 22200 |
| 700 | 29500 | 23500 | 23400 |
| 800 | 33500 | 26000 | 24600 |
| 900 | 37500 | 28500 | 25800 |
| 1000 | 41500 | 31000 | 27000 |
a. If the bakery shop is producing below 300 cakes per year then current situation is most cost effective for them
If the bakery shop is producing between 300 -700 cakes per year then semi-automatic situation is most cost effective for them
And if the bakery shop is producing more than 700 cakes per year then full-automatic situation is most cost effective for them
b. Graphical illustration of situation.
