Question

A company manufactures a product which has a variable cost of €6. The annual fixed costs are €24,000. Leasing a new production machine would increase fixed costs by 20% and reduce variable costs by 10%. At what level of output would it be worth considering changing to the new machine?

Answer 1

Answer:

It would be worth if the total costs incurred in old machine use is equal to total costs incurred in new machine use.

Total cost incurred under old machine = Total cost incurred under new machine

Let x = Level of output.

Variable cost + Fixed cost = Variable cost + Fixed cost

x($6) + $24,000 = x($6.00*90%) + ($24,000*120%)

x($6) + $24,000 = x($5.4) + $28,800

6x+$24,000 = 5.4x+$28,800

6x-5.4x = $28,800-$24,000

0.6x = $4,800

x = $4,800 ÷ 0.6

x= 8,000 units

So, At 8,000 level of output would it be worth considering changing to the new machine.