Question

NanoTech is ready to begin production of its exciting new technology. The company is evaluating three methods of production: (A) a small production facility with older equipment, (B) a larger production facility that is more automated, and (C) subcontracting to an electronics manufacturer in Singapore. Process A has a fixed cost of $200,000 and a variable cost of $40 per unit. Process B has a fixed cost of $600,000 and a variable cost of $20 per unit. Process C has no fixed cost since the item is purchased. It's variable cost is the purchase price of $60 per unit. For what levels of demand would each process be desirable

Answer 1

Answer:

Process A= from 10,001 to 19,999

Process B= 20,001 to infinity

Process C= from 0 to 9,999

Explanation:

Giving the following information:

Process A has a fixed cost of $200,000 and a variable cost of $40 per unit.

Process B has a fixed cost of $600,000 and a variable cost of $20 per unit.

Process C has no fixed cost since the item is purchased. It's variable cost is the purchase price of $60 per unit.

The general rule is that the lower the fixed costs, the fewer units are required to cover for costs. To determine the number of units for each process, we will compare process C to A, and then A to B.

Process C and A:

Process A= 200,000 + 40x

Process C= 60x

x= number of units

200,000 + 40x= 60x

200,000= 20x

10,000 = number of units

The indifference point is 10,000 units. From 0 to 9,999; process C is more convenient.

Process A and B:

Process A= 200,000 + 40x

Process B= 600,000 + 20x

200,000 + 40x = 600,000 + 20x

20x= 400,000

x= 20,000

The indifference point is 20,000 units. From 10,001 to 19,999; process A is more convenient.