Two manufacturing processes are being considered for making a new product. Process #1 is less capital intensive, with fixed costs of $50,000 per year and variable costs of $700 per unit
Process #2 has fixed costs of $400,000 annually, with variable costs of $200 per unit.
a. What is the break-even quantity for the two processes?
b. If annual sales are expected to be 600 units, which process should be selected?
c. 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?
d. Operations and Engineering have found a way to reduce the cost of the second process, such that the fixed costs for this process decrease from $400,000 to $300,000 annually. All other costs remain the same (1st process fixed = $50,000 / year, 1st process variable = $700 / unit, 2nd process variable = $200 / unit). What is the new break even quantity between the two processes?
e. Does this change the process selection for the annual sales volume of 600 units? If so, for what range of annual production quantities should you select the first process and the second process?
a. $50,000 + $700(Q) = $400,000 + $ 200(Q)
$500(Q) = $350,000 → Q = 700 units per year
b. Process #1: $50,000 + $700(600 ) = $470,000
Process #2: $400,000 + $200(600 ) = $520,000
Process #1 should be selected, since it will save $50,000 compared to Process #2 at an annual volume of 600 units.
c. In part b, we have seen that Process #1 is the better choice at volumes below the break even quantity of 700 units per year. Therefore,
Process #1 should be selected for volumes from 0 - 700 units per year;
Process #2 should be selected for volumes of 700 or more units per year.
d. $50,000 + $700(Q) = $300,000 + $ 200(Q)
$500(Q) = $250,000 → Q = 500 units per year
e. In this case,
Process #1: $50,000 + $700(600 ) = $470,000
Process #2: $300,000 + $200(600 ) = $420,000
Process #2 should be selected, since it will now save $50,000 compared to Process #1 at an annual volume of 600 units.
Process #1 should be selected for volumes from 0 — 500 units per year;
Process #2 should be selected for volumes of 500 or more units per year.
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