Question

The ABC company wants to choose between two new processes, B and C. The fixed cost for process B is $40,000 and for process C, $25,000. The variable cost for B is $3.00 per unit and for C, $8.00 per unit. The two processes have the same total costs at the following:

		a. 3,000 units and the total cost of $49,000.
		b. 3,000 units and the total cost of $15,000.
		c.15,000 units and the total cost of $3,000.
		d. 49,000 units and the total cost of $3,000.
		e. none of the above.

Answer 1

Given that there are two processes B & C.

Let, X be the total number of units produced.

For process B

Fixed cost = $40,000

Variable cost = $3.00 per unit

Therefore, Total cost = 3X + 40000

For process C

Fixed cost = $25,000

Variable cost = $8.00 per unit

Therefore, Total cost = 8X + 25000

To find the value of X at which the two processes have same total cost.

Therefore,

Total cost of B = Total cost of C

=> 3X + 40000 = 8X + 25000

=> 40000-25000 = 8X-3X

=> 15000 = 5X

=> X= 3000

Therefore, the processes will have same total costs when they produce 3000 units and the total cost is = 3X + 40000 = 3*3000 + 40000 = 49000

Therefore, correct answer is : (a) 3,000 units and the total cost of $49,000.

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