Question

Four Corners is an IBC company that sells delicious Navajo tacos in the Crossroads Food Court. Part of their success can be attributed to the freshly fried Indian bread that is used not only for the tacos, but also for dessert items. As demand grows the fry-bread process is becoming a bottleneck. Operations management for the company is looking at two different process options to replace the highly manual process currently being used. Option 1 (medium automation) would cost $175 to implement whereas Option 2 (high automation) would cost $350. With Option 1 the variable cost per fry bread produced would be $0.20. The variable cost for Option 2 would be $0.09 per fry bread. a. At what volume (demand) of fry breads is the cost for the two options the same? (Display your answer to two decimal places.) b. What is the total cost for either option at this break-even volume (answered in the last question)?

Answer 1

For Option 1:

Cost = $175

Variable Cost = $0.20

For Option 2:

Cost = $350

Variable Cost = $0.09

A).

Volume demand would be same at

175 + x × 0.20 = 350 + x × 0.09

175 + 0.20x = 350 + 0.09x

0.20x – 0.09x = 350 – 175

X = 175/0.11

X = $1590.9

B).

Total cost at this break-even volume is

For option 1:

= $175 +1590.9 × 0.20

= $493.18

For Option 2:

= $350 + 1590.9 × 0.09

= $493.18