Question

Aggies Candle Factory has recently been awarded a new contract with a large retailor in Doylestown. Demand for the candles is 25,0000 which a larger order than the company has ever handled before. They have called a business strategy meeting to ensure success of this project.; the Operations Manager has presented two different manufacturing options for consideration by the board:
Option A is highly automated with fixed costs of $25,000 and variable costs of $.1/candle.
Option B uses hand labor with fixed costs of $10,000 and variable costs of $.5/candle.
Which option should the board select and why?

Answer 1

Answer: Option A

Explanation:

From the question, the demand given is 250,000

For Option A,

Fixed cost = $25000

Variable cost = $0.1 per candle

Total cost = Fixed cost + Variable cost

Total cost = $25000 + ($0.1 × 250,000)

= $25,000 + $25,000

= $50,000

For Option B,

Fixed cost = $10000,

Variable cost = $0.5 per candle

Total cost = Fixed cost + Variable cost

Total cost = $10000 + ($0.5 × 250,000)

= $10,000 + $125,000

= $135,000

Therefore, the board should select option A as the total cost is cheaper than option B.