A firm is about to undertake the manufacture of a product, and is weighing the process configuration options. There are two intermittent processes under consideration, as well as a repetitive focus. The smaller intermittent process has fixed costs of $3,000 per month, and variable costs of $10 per unit. The larger intermittent process has fixed costs of $12,000 and variable costs of $2 per unit. A repetitive focus plant has fixed costs of $50,000 and variable costs of $1 per unit. a. At what output does the large intermittent process become cheaper than the small one? b. At what output does the repetitive process become cheaper than the larger intermittent process?

Question

Sophie Small

Business

23 February, 22:50

A firm is about to undertake the manufacture of a product, and is weighing the process configuration options. There are two intermittent processes under consideration, as well as a repetitive focus. The smaller intermittent process has fixed costs of $3,000 per month, and variable costs of $10 per unit. The larger intermittent process has fixed costs of $12,000 and variable costs of $2 per unit. A repetitive focus plant has fixed costs of $50,000 and variable costs of $1 per unit. a. At what output does the large intermittent process become cheaper than the small one? b. At what output does the repetitive process become cheaper than the larger intermittent process?

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Answers (1)

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Karlie Perkins · Answer 1

A.$1,125

B.$38,000

Explanation:

Using this formula:

Fixed Cost of Process B - Fixed Cost of Process A : Unit Variable cost of Process A - Unit Variable Cost of Process B

a.

Where:

Fixed Cost = $12,000

Fixed Cost = $3,000

Unit Variable = 10

Unit Variable = 2

Hence:

(12,000-3,000) / (10-2)

=$9,000/8

= $1,125

This means that large intermittent process become cheaper than the small one by $1,125

b.

Fixed Cost = $50,000

Fixed Cost = $12,000

Unit Variable = 2

Unit Variable = 1

(50,000-12,000) / (2-1)

=$38,000/1

= 38,000

This means that repetitive process become cheaper than the larger intermittent process by $38,000