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A small producer of machine tools wants to move to a larger building, and has identified two alternatives
A small producer of machine tools wants to move to a larger building, and has identified two alternatives. Location A has annual fixed costs of $210,000 and variable costs of $16,000 per unit; location B has annual fixed costs of $410,000 and variable costs of $12,000 per unit. The finished items sell for $22,000 each.
a) At what volume of output would the two locations have the same total cost?
Volume of output_____
b) For what range of output would location A be superior? (Enter your answer as a whole number. Do not include the indifference point in your answer.)
Range of output_____
c) For what range would B be superior? (Enter your answer as a whole number. Do not include the indifference point in your answer.)
Range of output_____
Expert Solution
Computation of Volume of Output:
Indifference point = Difference in Fixed Costs / Difference in Variable Cost per Unit
= ($410,000 - $210,000) / ($16,000 - $12,000)
= $200,000/$4,000
= 50 units
At Q = 50 units the two locations will have same cost.
Volume of output = 50 units
b. Computation of Range of Output where location A would be superior:
Below 50 units of output A will be superior
Range of output = 0 to 49
c. Computation of Range of Output where location B would be superior:
After 50 units of output B will be superior
Range of output = 51 or more
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