Question

A manager is trying to decide between two possible production processes. Process A would entail a variable cost of $33.24 per unit and an annual fixed cost of $44,055. Process B would entail a variable cost of $36.14 per unit and an annual fixed cost of $35,748.

The output generated using Process A would sell for $78 per unit while the output generated using Process B would sell for $72 per unit.

What is the volume for which the manager is indifferent between these two processes?

Answer 1

Let the production volume is x unit

Then Cost of production of process A = Cost of production of process B

No of units* cost per unit of A + fixed cost of A= No of units* cost per unit of B + fixed cost of B

X*$33.24 + $44055 = X*$36.14+$35748

X= 2865 units

It means at production volume of 2865 units the manager will be at indifference point of Process A and Process B

Selling cost of process A= 2865 units *$78 per unit = $223470

Selling cost of process B = 2865 units* $72 per units =$206280