Question

X Company spent $7,400 on an engineering study that revealed that Product A could be manufactured more efficiently. The new process would result in variable cost savings of $0.93 per unit and additional fixed costs of $3,300. Current variable costs per unit are 3.85, and current fixed costs are $10,950. Last year, X Company sold 3,800 units of Product A at a price of $12.80. At what unit sales level would X Company be indifferent between adopting the new process and not adopting it?

Answer 1

Indifference point means, we will have same operating cost under both methods.

Formula Method

Indifference point = Change in Fixed cost / Change in variable cost

= 3300 / 0.93 = 3548.39 Units

OR

Equation method

Current process cost equation is ........ 3.85 *X + 10950 ie variable cost + fixed cost

Proposed process cost equation is ........ 2.92 * X + 14250

Now solve the equations for X  

3.85 *X + 10950 = 2.92 * X + 14250

0.93 * X = 3300

X = 3548.39 Units