Question

Big John's Manufacturing Company currently produces its lead product on an "Old Machine" that has a variable cost of $0.32 per unit, and a fixed cost of $75,000. Big John is considering purchasing a "New Machine" that will drop the variable cost to $0.28 per unit, but has a fixed cost of $150,000. The crossover point for these two processes is 1,875,000 units. Referring to Scenario 1 above, which process is the most cost effective for a volume of 460,025 units?

Answer 1

Answer:

Old machine is more cost effective

Explanation:

Data provided in the question:

Variable cost for old machine = $0.32 per unit

Variable cost for new machine = $0.28 per unit

Fixed cost for old machine = $75,000

Fixed cost for new machine = $150,000

crossover point  = 1,875,000

For a volume of 460,025 units

Now,

For old machine

Total variable cost = 460,025 × $0.32

= $147,208

Thus,

Total cost =Total variable cost + Fixed cost

= $147,208 + $75,000

= $222,208

For the new machine

Total variable cost = 460,025 × $0.28

= $128,807

Thus,

Total cost =Total variable cost + Fixed cost

= $128,807 + $150,000

= $278,807

Since,

total cost for old machine is low

hence,

Old machine is more cost effective