Answer:
See below
Explanation:
A. The cost for each for each option;
•If demand level is 25,000 units per year
Option 1 = $500,000 + ($2 × 25,000 unit
= $500,000 + $50,000
= $550,000
Option 2 = $100,000 + ($10 × 25,000 units)
= $100,000 + $250,000
= $350,000
• If the demand level is 75,000 units per year
Option 1 = $500,000 + ($2 × 75,000 units)
= $500,000 + $150,000
= $650,000
Option 2 = $100,000 + ($10 × 75,000 units)
= $100,000 + $750,000
= $850,000
B. As the volume level increases, option 1 will be better since the variable cost is lower. As the volume decreases, option 2 will be better as the fixed cost is lower.
C. The indifference point
= Differential fixed cost/Differential variable cost per unit
= [$500,000 - $100,000]/[$10 -$2]
= $400,000/$8
= 50,000 units
