Unit 3: Albatross Anchor Essay

1466 Words Oct 21st, 2012 6 Pages
Question One
Based on the information presented in the scenario/case study discuss Albatross Anchor’s competitiveness in relation to (please address all items in the below list and provide support for your conclusions):
1. Cost
a) Cost of Production:
Cost of production is costs incurred by Albatross Anchor when manufacturing an anchor. There are two types of costs – fixed and variable. Variable costs depend on what materials and labor are needed to make the anchor and vary with the volume of anchors produced. Fixed costs, such as rent or utilities, are always constant no matter how many anchors are produced (Russell & Taylor, 2011, p. 230).
Manufacturing costs are $8.00 per pound for the Albatross mushroom/bell anchor and $11.00
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Question Two
There are many ways that mushroom/bell anchors may be manufactured. Albatross Anchor is considering two new manufacturing processes (Process A and Process B) to reduce costs. Analysis of the information below will help determine which process has the lowest breakeven point (this validates the process is more cost effective).
For each process the following fixed costs and variable costs are identified below:
Anchor and Process Process A Process B
Sale price per anchor $45.00 $45.00
Total Fixed cost $ 650,000.00 $950,000.00
Variable cost per anchor $ 36.00 $ 29.99

Based on the information in the table above complete the table below:
Anchor and Process Process A Process B
(a) Profit per anchor $9.00 $15.01
(b) The total number of anchors to attain break–even point 72,222 units 63,291 units

Work for Question 2a:
Process A
Profit = Selling price – Variable Cost
45 – 36 = 9
Process B
Profit = Selling price – Variable Cost
45 – 29.99 = 15.01

Work for Question 2b:
Process A
Breakeven Point
Fixed costs / price – variable costs
650,000 / (45 – 36)
= 650,000 / 9 = 72,222 units

Process B
Breakeven Point
Fixed costs / price – variable costs
950,000 / (45 – 29.99)
= 950,000 / 15.01
= 63,291 units

(c) Based on your calculations which Process (A or B) that you would recommend for adoption (you can select only one). Please make sure to explain how you arrived at your conclusion.

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