Question

Connie Brothers Company is deciding between two different machines for making plastic casing for computer games. The first machine has a fixed cost of $18,000 and variable costs of $.90 per casing. The second machine is less expensive (fixed cost = $9,000), but it would require greater variable costs. If the selling price per casing will be the same under each machine and the level of output at which the two methods produce the same net operating income is 10,000 units, what is the variable cost associated with the 2nd machine? (Hint: Total Cost (TC) = FC + VC[Q]; same net income will be when each output level is equal to the other; ie, when Total CostMachine 1 = Total CostMachine 2.)
a.
$1.10
b.
$1.80
c.
$2.05
d.
$2.45

Please show work on how you got the answer thanks.

Answer 1

Correct option is > b. $1.80

Working:

Total cost contribution of each machine should be same then only the will generate same operating profit.

Machine 1 total cost = Machine 2 total cost

Therefore;

Variable cost for Machine 1 x Total units + Fixed cost Machine 1  = Variable cost Machine 2 x Total units + Fixed cost for machine 2

We don’t know variable cost for machine 2, so let it be V

0.90 x 10000 + 18000 = V x 10000 + 9000

V x 10000 = 27000 - 9000

V = 18000/10000

V = $1.80