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Homework answers / question archive / Two processes are put in place for production
Two processes are put in place for production. Neither will be removed. Process R is designed to produce 10,000 units per year and has a fixed cost of $90,000 per year. Process T has the same design capacity and has a fixed cost of $80,000 per year. Process R produces the initial 4,000 units at a variable cost of $8 per unit and the next 6,000 units at a variable cost of $17 per unit. Process T produces the first 5,000 units at a variable cost of $9 each and produces the next 5,000 at $5 each. Assume that the fixed costs are incurred even if no production is assigned to the process.
a) What should be the loads assigned to Processes R and T if demand for the product is 5,500 units?
Process R load: units
Process T load: units
b) What is the total cost and average cost per unit for Part a?
Total Cost: $
Average Cost per Unit: $
c) What should be the loads assigned to Processes R and T if demand for the product is 9,500 units?
Process R load: units
Process T load: units
d) What is the total cost and average cost per unit for Part c?
Total Cost: $
Average Cost per Unit: $
a.) Going by the least variable costs incurred.
Process R initial variable cost is $8 for the first 4,000 units
Process T initial variable cost is $9 each for the 5,000 units.
It would therefore, be more economical to produced the first 4,000 units using process R and the remaining 1,500 units using process T.
b.) Total cost is equal to total variable costs and the total variable costs.
TC = FCR+VCR+FCT+VCT FCR+VCR+FCT+VCT
Where;
TC is the total cost
FCR FCR is the fixed cost for process R.
VCR VCR is the variable cost for process R.
FCT FCT is the fixed cost for process T.
VCT VCT is the variable cost for process T.
Therefore;
TC = 90,000 +(8*4,000) + 80,000 + (9*1,500)
TC = &215,500
The average cost is obtained through the following method.
AC = TC/output
AC = 215,500/5,500
= $39.18
C.) Process R has an initial variable cost of $8 per unit for the first 4,000 units and a following variable cost of $17 per unit, for the next 6,000 units. Process T has an initial variable cost of $9 per unit for the first 5,000 units and a following variable cost of $5 for the next 5,000 units. It is therefore more economical to produce zero units through process R and all 9,500 unit through process T.
d.) The total cost is obtained through the following method;
TC = FCR+FCT+VCT FCR+FCT+VCT
TC = 90,000 + 80,000 + (9*5,000) + (4,500*5)
TC = 170,000 + 45,000 + 22,500
TC = $237,500
To find the average cost;
AC = TC/units of output
AC = 237,500/9,500
AC = $25
