Question

Process X has fixed costs of $10,000 and variable costs of $2.40 per unit. Process Y has fixed costs of $9,000 and variable costs of $2.25 per unit. Which of the following statements is true?

a.The crossover point is approximately 6667 units.
b. It is impossible for one process to have both of its costs lower than those of another process.
c. Process Y is cheaper than process X at all volumes; there is no crossover point.
d. Process X should be selected for very large production volumes.
e. Process X is more profitable than process Y and should be selected.

Answer 1

Answer:

The correct answer is C.

Explanation:

Giving the following information:

Process X has fixed costs of $10,000 and variable costs of $2.40 per unit. Process Y has fixed costs of $9,000 and variable costs of $2.25 per unit.

X= 10,000 + 2.4*x

Y=9000 + 2.25y

We will suppose 5 levels of production

1 units, 1000 units , 5550 units, 20,000 units, 110,111 units.

1 unit:

X= $10,002.4

Y= $9,002.25

1000 units:

X= $12,400

Y= $11,250

5550 units:

X= $23,320

Y= $21,487.5

20,000 units:

X= $58,000

Y= $54,000

110,111 units:

X= $274,266.4

Y= $256,749.75

Process Y has a lower fixed cost and a lower variable cost. In all quantities of production, it will present a lower total cost compare to Process X.