Question

Three processes have the following costs: Process A has a fixed cost of $2,000 and variable cost of $3.00/unit. Process B’s fixed cost is $4,000 and variable cost is $2.60/unit. Process C’s fixed cost is $8,000 and variable cost is $2.40/unit. If the projected total demand is for 6,000 units, which process should be used?

Answer 1

Answer:

Process B should be used.

Explanation:

Total Cost = Fixed Cost + Variable Cost

Total Cost = Fixed Cost + (Average Variable Cost)x(Quantity)

Process A : TC = 2000 + (3)x(6000) = 2000 + 18000

= $ 20000

Process B : TC = 4000 + (2.60)x(6000) = 4000 + 15600

= $ 19600

Process C : TC =  8000 + (2.40)x(6000) = 8000 + 14400

= $ 22400

Since Total Cost for producing 6000 units quantity demanded is least by Process B , Process B should be used .