Question

A comppany would like to build a new facility and has selected two possible locations. The cost information about each location is shown below.

Location Gamma, Fixed cost = $930,000 per year, Unit variable cost = $94 per unit

Location Delta, Fixed cost = $700,000 per year, Unit variable cost = $118 per uniit

You must help the company to identify the quantity range over which each location provies the lowest cost.

You must show your calculation steps . Use at least 4 decimal in calculation and answer.

if the quantity is smaller than _______ units per year, then location ________ is more economical.

If the quantity is larger than _____ units per year, then location _______ is more econoomical.

Answer 1

Solution:

Location Gamma

Fixed cost = $930,000 per year

Unit variable cost = $94 per unit

Location Delta

Fixed cost = $700,000 per year

Unit variable cost = $118 per unit

Suppose the total units produced = x units

Using the break-even analysis method, at x units, the total cost of both the locations will be equal. That is,

$930,000 + $94 x = $700,000 + $118 x

24 x = 230,000

x = 9583.3333

At x = 9583.3333 units, the total cost of both the locations i.e. Gamma and Delta will be equal.

Answer:

if the quantity is smaller than 9583.3333 units per year, then location Delta is more economical.

If the quantity is larger than 9583.3333 units per year, then location Gamma is more economical.