Asked by Hannah Crenshaw on Jul 05, 2024
Verified
Fred's Fabrication, Inc. wants to increase capacity by adding a new machine. The firm is considering proposals from vendor A and vendor B. The fixed costs for machine A are $90,000 and for machine B, $70,000. The variable cost for A is $9.00 per unit and for B, $14.00. The revenue generated by the units processed on these machines is $20 per unit. The crossover between machine A and machine B is
A) 4,000 units, with A more profitable at low volumes.
B) 4,000 dollars, with A more profitable at low volumes.
C) 4,000 units, with B more profitable at low volumes.
D) 4,000 dollars, with B more profitable at low volumes.
E) cannot be calculated from the information provided.
Crossover
In genetics, the exchange of genetic material between chromosomes during meiosis; in other fields, it refers to a point where two or more different categories or entities meet.
Fixed Costs
Expenses that do not change with the level of production or business activity, such as rent, salaries, and insurance premiums.
Variable Cost
Costs that vary directly with the level of production or sales volume, such as materials and labor.
- Analyze the monetary sustainability of various capacity choices by employing net present value analysis.
Verified Answer
RD
Regine DorvilusJul 11, 2024
Final Answer :
C
Explanation :
To find the crossover point, we need to set the revenue from each machine equal to their respective total cost:
20Q = 90,000 + 9Q for machine A
20Q = 70,000 + 14Q for machine B
Solving these equations, we get Q = 4,000 units.
Therefore, the crossover point is 4,000 units, and machine B is more profitable at low volumes, since its variable cost per unit is lower than that of machine A.
20Q = 90,000 + 9Q for machine A
20Q = 70,000 + 14Q for machine B
Solving these equations, we get Q = 4,000 units.
Therefore, the crossover point is 4,000 units, and machine B is more profitable at low volumes, since its variable cost per unit is lower than that of machine A.
Learning Objectives
- Analyze the monetary sustainability of various capacity choices by employing net present value analysis.