Question

A firm is about to undertake the manufacture of a product, and it is weighing the process configuration options. There are two intermittent processes under consideration, as well as a repetitive focus. The smaller intermittent process has fixed costs of $3,000 per month and variable costs of $10 per unit. The larger intermittent process has fixed costs of $11,000 per month and variable costs of $5 per unit. A repetitive focus plant has fixed costs of $41,000 per month and variable costs of $1 per unit.

Required:
a. At what output does the large intermittent process become cheaper than the small one?
b. At what output does the repetitive process become cheaper than the larger intermittent process?

Answer 1

See below

Step-by-step explanation:

Using this formula

Fixed cost of process B - fixed cost of process A ÷ unit variable cost of process A - unit variable cost of process B

a. Fixed cost = $11,000

Fixed cost = $3,000

Unit variable = $10

Unit variable = $5

Hence:

= ($11,000 - $3,000) / ($10 - $5)

= $7,000 / $5

= $1,400

This means that the larger intermittent process becomes cheaper than the small one by $1,400

b. Fixed cost = $41,000

Fixed cost = $11,000

Unit variable = $5

Unit variable = $1

= ($41,000 - $11,000) / ($5 - $1)

= $30,000 / $4

= $7,500

This means that the repetitive process become cheaper than the larger intermittent process by $7,500