Question

A specified part can be obtained by either two methods. Method A will have a fixed cost of $110,000 per year and variable cost of $30 per unit. Method B will have fixed cost of $200,000 per year and variable cost of $15 per unit. The number of units that must be produced each year for the two methods to be equally attractive is:

Question 18 options:

	6,000 units
	6,889 units
	4,000 units
	8,000 units

Answer 1

The correct answer is (a) 6000 units

We have to find the quantity that must be produced each year for the two methods to be equally attractive and for that we have to find quantity at which Cost of producing that quantity is same for both the methods and then only they both are equally attractive.

Let that quantity be Q

METHOD A

Fixed Cost = $110,000

Variable Cost = 30Q

Hence Total Cost = Fixed Cost + variable Cost = 110,000 + 30Q

METHOD B

Fixed Cost = $200,000

Variable Cost = 15Q

Hence Total Cost = Fixed Cost + variable Cost = 200,000 + 15Q

Now, we have to find quantity at which Cost of producing that quantity is same for both the methods

=> 110,000 + 30Q = 200,000 + 15Q

=> 15Q = 90,000

=> Q = 6,000

Hence, the quantity that must be produced each year for the two methods to be equally attractive is 6000 units.

Hence, the correct answer is (a) 6000 units