Question

Process A has fixed costs of $1000 and variable costs of $5 per unit. Process B has fixed costs of $500 and variable costs of $15 per unit. What is the crossover point between process A and process
B?

a. 50 units
b. 200 units
c. $2,500
d. $5,000
e. $9,500

Answer 1

Answer:

a. 50 units

Explanation:

The Crossover Analysis is totally inevitable when we need to identify the point whether we can switch one product to another that do have similarity in benefit, while they have different variable and fixed costs.

Then we should find the point for Crossover Units. Crossover Unit=(Fixed Cost 1 –Fixed Cost 2)/(Variable Cost 2-Variable Cost 2)

We have:

Process A with Fixed Cost=1000 and Variable Cost=5 for unit

Process B with Fixed Cost=500 and Variable Cost=15 for unit

Crossover point of unit=(Fixed Cost 1 –Fixed Cost 2)/(Variable Cost 2-Variable Cost 2)= (1000-500)/(15-5)=50 units.

This means that at 50 units, the total cost of each of the two projects is equal.  If you expect to sell more than 50 units then Project A would be the best choice.  If you expect to sell less than 50 units then Project B would be the best choice.