MGOC20H3 Lecture Notes - Lecture 2: Fixed Cost, Variable Cost, Net Present Value

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6 Jun 2022
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Shao qi & mohammed shadman limited (sml) has to decide what size of new plant to build. The capital costs and annual fixed and variable costs for different size of plants are as follows: Sml will discover how the market is receiving their product after the first year of operation. In the meantime, they assess the prospects of being able to obtain various unit prices for their product at different levels of output are as follows: The probabilities of high and low market conditions are 60%, and 40% respectively. After the first year, sml can adjust to the market conditions. They can build an additional 3,000 unit plant. Alternatively, they can reduce the capacity of the larger plant by 3,000 units, which will realize ,500,000 immediately and reduce the annual fixed cost by ,000. In this case, the advantage of lower variable cost are retained.

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