Contemporary Engineering Economics 6th Edition by Chan Park

Exercise 1

The Hamilton Flour Company is currently operating its mill six days per week, 24 hours per day, on three shifts. At current prices, the company could easily obtain a sufficient volume of sales to take the entire output of a seventh day of operation each week. The mill's practical capacity is 6.000 hundredweight of flour per day. Note that:
• Flour sells for $20.24 per hundredweight (cwt) and the price of wheat is $8.35 per bushel. About 2.35 bushels of wheat are required per cwt of flour. Fixed costs now average $8,520 per day (or $1.42 per cwt). The average variable cost of mill operation, almost entirely wages, is $0.68 per cwt.
• With Sunday operation, wages would be doubled for Sunday work, which would bring the variable cost of Sunday operation to $1.36 per cwt. If the mill were to operate on Sunday, the daily fixed cost would increase by $850, such that the total fixed cost for a 7-day operation would be $51,970.
(a) Using die information provided, compute the break-even volumes for six-day and seven-day operation.
(b) What are the marginal contribution rates for six-day and seven-day operation?
(c) Compute the average total cost per cwt for six- day operation and the net profit margin per cwt before taxes.
(d) Would it be economical for the mill to operate on Sundays? (Justify your answer numerically.)