Question

This is a process strategy question.

Machine	Fixed Cost	Var Cost ($per lb)
A	100	1.2
B	500	0.1

A. Which one should you use?

B. Also, what is the cross-over point?

Answer 1

Given values:

Machine A, Fixed cost = 100

Machine A, Variable cost = $1.2 per lb

Machine B, Fixed cost = 500

Machine B, Variable cost = $0.1 per lb

Solution:

Using the Breakeven Analysis, crossover point can be determined. Crossover point is the point where total cost of both the machines will be equal. Let the volume at the crossover point be represented by Q. Therefore, at the crossover point,

Total cost (Machine A) = Total cost (Machine B)

100 + $1.2 Q = 500 + $0.1 Q

$1.1 Q = 400

Q = 363.64 or 364 (Rounding off to the nearest whole number)

Crossover point = 364 units

Conclusion:

For quantity, Q = 1 to 363 units, Machine A should be used. (because of lower total cost)

For quantity, Q = 364 units, Either of Machine A or Machine B can be used, because of equal cost.

For quantity, Q = 365 units or more, Machine B should be used. (because of lower total cost).