Answer:
At an annual requirement of 40,000 units, selecting the low-cost option will save the company per year:
b) $50,000
Explanation:
a) Data and Calculations:
ALTERNATIVE FIXED COST VARIABLE COST
Special-Purpose Equipment $200,000 per year $15 per unit
General-Purpose Equipment $50,000 per year $20 per unit
Total Cost of Production for 40,000 units under the two alternatives:
ALTERNATIVE FIXED COST VARIABLE COST TOTAL COSTS
Special-Purpose $200,000 $600,000 ($15*40,000) $800,000
General-Purpose $50,000 $800,000 ($20*40,000) $850,000
b) The difference between the two alternatives in total costs is $50,000 ($850,000 - $800,000) with the low-cost alternative as the Special-Purpose Equipment.
