Question

A company is evaluating which of two alternatives should be used to produce a product that will sell for $35 per unit. The following cost information describes the two alternatives.

Process A Process B
Fixed Cost $500,000 $750,000
Variable Cost per Unit $25 $23

Requirement:;
i) Calculate the breakeven volume for Process A. (show calculation to receive credit)

ii) Calculate the breakeven volume for Process B. (show calculation to receive credit)

III) Directions: Show calculation below and Circle the letter of the correct answer.
If total demand (volume) is 120,000 units, then the company should
select Process A with a profit of $940,000 to maximize profit
select Process B with a profit of $450,000 to maximize profit
select Process A with a profit of $700,000 to maximize profit
select Process B with a profit of $690,000 to maximize profit

Answer 1

A.50,000 units

B.62,500 units

C.Process A with a profit of $700,000 to maximize profit

Explanation:

A.Calculation for the breakeven volume for Process A

Using this formula

Breakeven volume for Process A= Fixed cost/(Sales per units-Variable cost per units)

Let plug in the formula

Breakeven volume for Process A=500,000/(35-25)

Breakeven volume for Process A=500,000/10

Breakeven volume for Process A=50,000 units

B.Calculation for the breakeven volume for Process B

Using this formula

Breakeven volume for Process B= Fixed cost/(Sales per units-Variable cost per units)

Let plug in the formula

Breakeven volume for Process B=750,000/(35-23)

Breakeven volume for Process B=750,000/12

Breakeven volume for Process B=62,500 units

C. Calculation for what the company should do if the total demand (volume) is 120,000 units

Using this formula

Profit=(Total demand*(Sales per units-Variable cost per units for Process A)- Process A fixed cost

Let plug in the formula

Profit =120,000*($35-$25)-$500,000

Profit=120,000*10-$500,000

Profit=1,200,000-$500,000

Profit= $700,000

Therefore If total demand (volume) is 120,000 units, then the company should select Process A with a profit of $700,000 to maximize profit.