Question

Driehaus Manufacturing intends to increase capacity through the addition of new equipment. Two vendors have presented proposals. The fixed cost for proposal A is $62,000, and for proposal B, $35,000. The variable cost for A is $11, and for B, $14. The revenue generated by each unit is $20. a. What is the crossover point in units for the two options? b. At an expected volume of 8,300 units, which alternative should be chosen?

Answer 1

Answer:

A. The crossover point in units is 9000 units

B. Alternate B or Proposal B should be chosen

Explanation:

a.

Let x be the number of units.

The profit equation for option 1 can be written as (20-11)x - 62000

The profit equation for option 2 can be written as (20-14)x - 35000

The crossover point is where both optons yield equal profit thus equation 1 = equation 2.

(20-11)x - 62000 = (20-14)x - 35000

9x - 62000 = 6x - 35000

9x - 6x = 62000 - 35000

3x = 27000

x = 27000 / 3

x = 9000 units

b.

At 8300units,

Profit from proposal A is = 9(8300) - 62000 = 12700

Profit from proposal B is = 6(8300) - 35000 = 14800

Thus option B is more profitable at this unit.