Question

A company is considering two alternative technologies for manufacturing a product. The cost data are shown below:

	Technology A	Technology B
Fixed Cost	$15,000	$35,000
Variable Cost	$30/unit	$5/unit

If the forecast annual production volume is 500 units, which technology alternative should the firm choose?

Technology B

Technology A

It is indifference between the two processes.

Answer 1

Ans: Technology A

Explanation:

For technology A;

Total cost = Fixed cost + Variable cost

= $15000 + ( $30 * 500) = $15,000 + $15,000 = $30,000

Average total cost ( ATC ) = Total cost / Quantity = $30,000 / 500 = $60

For technology B;

Total cost = Fixed cost + Variable cost

= $35000 + ( $5 * 500) = $35,000 + $2,500 = $37,500

Average total cost ( ATC ) = Total cost / Quantity = $37500 / 500 = $75

It is observed that the average cost of production in technology A is less than the technology B. So technology A is cost effective and the firm should choose.