Question

A company has3process options with the following costs:Process OptionsABCfixed cost ($)1,200,000220,000580,000variable cost/unit ($)31371)Find the range of forecasted volumes where process Cis optimal.2)The Point of Indifference between Process A and Process Boccurs at a total costof $________.3)The company has chosen process Aand expects to operate at a lossuntil 30,000 units have been sold.What is the price for each unit s

Answer 1

Answer: See explanation

Explanation:

a. First and foremost, we have to get the total cost equations which will be:

Total cost (A) = 1200000 + 3Q

Total Cost (B) = 220000 + 13Q

Total Cost (C) = 580000 + 7Q

To get the range of forecasted volumes where process C is optimal, we have to get the cross-over point between A, B and C which goes thus:

Between A and C will be:

= (1200000 - 580000)/(7 - 3)

= 620000/4

= 155,000

Between B and C will be:

= (220000 - 580000)/(7 - 13)

= 360,000 / 6

= 60,000

Therefore, the range of the forecasted volumes where process C is optimal will be [60000, 155000]

(b) The point of indifference between A and B will be the difference in their fixed cost divided by the difference in their variable cost which will be:

= (1200000 - 220000)/(13 - 3)

= 980,000 / 10

= 98,000

(c) The price for each unit will be:

30,000 = 1200,000 / (Selling price - 3)

Selling price - 3 = 1200,000 / 30,000

Selling price - 3 = 40

Selling price = 40 + 3

Selling price = $43