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Homework answers / question archive / Two manufacturing processes are being considered for making a new product
Two manufacturing processes are being considered for making a new product. process #1 is less capital intensive, with fixed cost of $50000 per year and variable cost of $700 per unit. process #2 has a fixed cost of $400000 annually, with variable cost of $200 per unit. if lowest overall costs per year is your overall objective, for what range of annual production quantities should you select the first process? the second process? operation and engineering have found a way to reduce the cost of the second process, such that the fixed costs for this process decrease from $400000 to $300000 annually. all other cots remain the same. what will be the knew break even quantity between the two process? does this change the process selection for the annual sales volume of 600 units ? if so, for what range of annual production qualities should you select the first process and the second process?
Suppose that the number of new products made per year is: A.
Total cost (process#1)= fixed cost + variable cost= $50,000+ $700A
Total cost (process#2)= fixed cost + variable cost= $400,000+ $200A
Total cost of both process are equal if 50000+700A = $400,000+$200A \RightarrowA= $700
Hence,
If the annual production is less than 700 units, Process#1 should be selected.
If the annual production is more than 700 units, Process#2 should be selected.
Total Cost:
Total cost is the sum of fixed as well as variable cost occurred into the production process along with the selling or marketing process. Here variable costs depend on the output quantity.
