A Company That Produces Breakfast Cereal Using a Highly Automated

question 48

Essay

A company that produces breakfast cereal using a highly automated packaging process has the following production and revenue alternatives for three products A, B, and C) that are feasible to produce with existing plant and equipment:

TR is in thousands of dollars per month. Total cost for the first shift is $90,000 per month - of which $60,000 is labor, $20,000 is other variable costs, and $10,000 is fixed cost. As the number of shifts is increased, fixed cost remains at $20,000 per month while variable costs other than labor remain the same per shift. For the second shift, labor must be paid 1.3 times the amount paid on the first shift. For the third shift, labor must be paid 1.5 times what it receives in the first shift.
a. Determine total cost for the two-shift and three-shift alternatives.
b. Indicate the product combination and shift level that maximizes profit.

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Definitions:

Reserve Requirement Ratio

The fraction of deposits that banks must hold in reserve and not loan out, as mandated by central banking authorities.

Central Bank

An institution designed to oversee the banking system, regulate the quantity of money in the economy, and provide various financial services to the government.

Treasury Bonds

Long-term government debt securities with a fixed interest rate, considered low-risk investments.

Required Reserves

The minimum amount of deposits that a bank must hold in reserve and not lend out, as mandated by central banking regulations.