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.
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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