Question

A small producer of machine tools wants to move to a larger building, and has identified two alternatives. Location A has annual fixed costs of $210,000 and variable costs of $16,000 per unit; location B has annual fixed costs of $410,000 and variable costs of $12,000 per unit. The finished items sell for $22,000 each.
Required:
a. At what volume of output would the two locations have the same total cost?
b. For what range of output would location A be superior?
c. For what range would B be superior?

Answer 1

Answer:

a)

Indifference point = Difference in fixed costs / Difference in variable cost per unit

= ($410,000 - $210,000) / ($16,000 - $12,000)

= 50 units.

b) and C)

I have selected 49 units for calculation as at 50 units, both locations are indifferent.

units 49 49

Location A Location B

Sales 1,078,000 1,078,000

Less: Variable costs 784,000 588,000

Contribution 294,000 490,000

Less: Fixed Costs 210,000 410,000

Profit 84,000 80,000

As we can find, at 49 units, Location A gives more profits than Location B.

So, till 50 units, location A should be used and after 50 units location B should be used.

Explanation:

Answer 2

A small producer of machine tools wants to move to a larger building, and has identified two alternatives is :

A) The volume of output would the two locations have the same total cost is 50 units.

B) As we can find, at 49 units, Location A gives more profits than Location B.

C) So, till 50 units, location A should be used and after 50 units location B should be used.

"Total Cost"

Answer A:

The volume of output would the two locations have the same total cost is :

Formula:

Indifference point = Difference in fixed costs / Difference in variable cost per unit

Indifference point= ($410,000 - $210,000) / ($16,000 - $12,000)

Indifference point= 50 units.

The volume of output would the two locations have the same total cost is 50 units.

Answer B:

I have selected 49 units for calculation as at 50 units, both locations are indifferent.

                                            Location A                       Location B

Sales                                      1,078,000                     1,078,000

Less: Variable costs               784,000                        588,000

Contribution                            294,000                         490,000

Less: Fixed Costs                    210,000                          410,000

Profit                                         84,000                           80,000

As we can find, at 49 units, Location A gives more profits than Location B.

Answer C:

So, till 50 units, location A should be used and after 50 units location B should be used.

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