Question

OpMan, Inc. expects a successful product launch of its new product but unsure of which assembly process to use. What is the Point of Indifference given the product will sell for $35.00 per unit?

	Process A	Process B
Fixed Cost	$500,000	$750,000
Variable Cost per Unit	$25	$23

Answer 1

Process A

Fixed Cost - $500,000

Variable cost per unit - $25

Process B

Fixed cost - $750,000

Variable cost per unit - $23

Cost indifference point is the point at which the total cost of both the processes is same. ti is calculated as below:

Indifference point = differential fixed cost / differential variable cost per unit

indifference point = (750,000 - 500,000)/(25-23) = 250,000/2 = 125,000 Units

therefore the indifference point for our case is 125,000. If these many units are produced by process a and b the cost will be same.

Proof

Process A -> total cost = 500,000 + ( 125,000 X 25 ) = 3625000

Process B -> 750,000 + (125,000X23) = 3625000