Question

Process X is estimated to have a fixed cost of $37,500 per year and a variable cost of $60 per unit in year 1, decreasing by $5 per unit per year thereafter. Process Y will have a fixed cost of $75,000 per year and a variable cost of $10 per unit in year 1, increasing by $1 per unit per year thereafter. At an interest rate of 12% per year, how many units must be produced in year 6 for the two processes to break even?

The number of units that must be produced is determined to be  .

Answer 1

Process X
Fixed Cost= 37,500
Variable Cost at (t=1) = 60 p.u.
Decrease per year = 5 p.u.
Therefore, Variable Cost at (t=6) = 60-5*5= 25 p.u.
Process Y
Fixed Cost= 75,000
Variable Cost at (t=1) = 10 p.u.
Increase per year = 1 p.u.
Therefore, Variable Cost at (t=6) = 10+5*1= 15 p.u.
Therefore , Brekeven Point= Total Fixed Cost/ Variable Cost P.u.
BEP = (37500+75000)/(25+15)
=112500/40
=2812.5 units= 2813 units