Question

Spartan Castings must implement a manufacturing process that reduces the amount of particulates emitted into the atmosphere. Two processes have been identified that provide the same level of particulate reduction. The first process is expected to incur $ 300 comma 000 of fixed cost and add $ 60 of variable cost to each casting Spartan produces. The second process has fixed costs of $ 200 comma 000 and adds $ 80 of variable cost per casting.

What is the break-even quantity beyond which the first process is more attractive?
What is the difference in total cost if the quantity produced are 10,000?

Answer 1

(a) 5,000

(b) $100,000

Step-by-step explanation:

(a) Break Even Point:

= Difference in Fixed Cost ÷ Difference in Variable Cost

= ($300,000 - $200,000) ÷ ($80 - $60)

= $100,000 ÷ $20

= 5,000

(b) If quantity produced are 10,000 units,

Total cost of first process:

= Fixed cost + Variable cost

= $300,000 + ($60 × 10,000)

= $300,000 + $600,000

= $900,000

Total cost of second process:

= Fixed cost + Variable cost

= $200,000 + ($80 × 10,000)

= $200,000 + $800,000

= $1,000,000

Therefore,

Difference in total cost:

= Total cost of second process - Total cost of first process

= $1,000,000 - $900,000

= $100,000