Question

Worthington Machining must decide whether to purchase Process A with specialized metal folding equipment needing two employees to operate it or Process B with general purpose folding equipment requiring five employees. Process A requires a fixed cost of $1,430,000 and a variable cost of $14.32 per metal panel. Process B requires a fixed cost of $820,000 and a variable cost of $20.05. Process A is more automated than Process B. What is the break-even quantity between these two processes

Answer 1

Answer:

The indifference point is 106,457 units.

Explanation:

Giving the following information:

Process A:

Fixed cost= $1,430,000

Variable cost= $14.32 per metal panel.

Process B:

Fixed cost= $820,000

Variable cost= $20.05 per metal panel.

To calculate the indifference point between two processes, first, we need to formulate the total cost equation for each process:

Process A:

Total cost= 1,430,000 + 14.32*x

Process B:

Total cost= 820,000 + 20.05*x

x= number of units

Now, we need to equal both formulas and isolate x:

1,430,000 + 14.32x = 820,000 + 20.05x

610,000 = 5.73x

x= 106,457

The indifference point is 106,457 units.