Question

PowerBright must decide between two locations on which to build a new power station to provide 60 megawatt hours of electricity a month. Location A would have a variable cost of $1,000 per megawatt hour and Location B would have a variable cost of $1,500 per megawatt hour. A power station at Location A would also require a fixed cost of $70,000 a month, although an estimate of the monthly fixed cost at Location B has not been made available yet, due to ongoing negotiations with a land owner there. At what fixed cost for Location B would PowerBright be indifferent to the choice of either of these two locations?

Answer 1

Answer:

Fixed cost of B = $40000

Explanation:

To identify the indifference point,

Fixed cost of A + Variable cost of A = Fixed cost of B + Variable cost of B

$70000 + $1000 x = Fixed cost of B + $1500 X

The value of x is 60

$70000 +$1000(60) = Fixed cost of B +$1500(60)

$70000+$60000 = Fixed cost of B + $90000

Fixed cost of B = $130000 -$90000

Fixed cost of B = $40000