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A firm is about to undertake the manufacture of a product, and is weighing the process configuration options
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?
Expert Solution
Answer:
The output at which one process becomes cheaper than the other is called cross over point. It is determined as the point, where the total cost including fixed and variable of both processes become equal. Therefore cross over point for two processes A and B = ( Fixed of process B - fixed cost of process A) / (unit variable cost of process A - unit variable cost of process B)
a. The cross-overpoint for large intermittment process over small one = (12000-3000)/(10-2) = 1125
b. The cross-overpoint for repetitive process over large intermittent process = (50000-12000)/(2-1) = 38000
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