Question

You currently purchase a part used in your production process from an outside supplier, and have decided to begin making this part in-house. You have two equipment options for moving production in-house: special-purpose equipment and general-purpose equipment. Cost information for these two options is as follows: ALTERNATIVE FIXED COST VARIABLE COST Special-Purpose Equipment $200,000 per year $15 per unit General-Purpose Equipment $50,000 per year $20 per unit For what range of output is the Special-Purpose Equipment the low-cost option? A) 30,000 or more units per year B) 40,000 or more units per year C) 0 - 30,000 units per year D) 0 - 40,000 units per year

Answer 1

Answer:

The correct answer is A.

Explanation:

Giving the following information:

Special-Purpose Equipment:

Fixed costs= $200,000 per year

Unitary variable cost= $15 per unit

General-Purpose Equipment:

Fixed costs= $50,000 per year

Unitary variable cost= $20 per unit

We need to find the cost function:

Special-Purpose= 200,000 + 15*q

General-Purpose= 50,000 + 20*q

200,000 + 15q = 50,000 + 20q

150,000=5q

30,000 = q

30,000 units is the indifference point. From 30,000 units Special-Purpose is cheaper.