The Gregory's Pie Company is facing a capacity dilemma in that the current capacity is at its limits, but at the same time, capital investment in a new line is high and, additionally, a new line might lead to a situation of over capacity.
The fixed cost of investment is estimated at 600.000 Euros for a capacity of 150.000 pies per month, and 1.000.000 Euros for a capacity of 300.000 pies per month.
Variable cost is 2.00 Euros per pie for a quantity up to 150.000 pies per month and 1.50 Euros per pie for a production of 150.00 to 300.000 per month. Pies are sold in the market for 7 Euros per item.
Current demand is 120.000 pies per month. There is an opportunity to take on production for another brand (which searches for outsourcing partners) of an additional 50.000 pies per month.
1. Compute the break-even quantity for production below and above 150.000 pies.
2. What do you advise management to do?
Break Even quantity for production below 150,000
7*x = 2*x + 600,000
=> 5*x = 600,000
=> x = 120,000
Break Even quantity for ...
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