Please EXPLAIN and solve in a very simple way. Thanks! Nagle Electric, Inc., of
ID: 329677 • Letter: P
Question
Please EXPLAIN and solve in a very simple way. Thanks!
Nagle Electric, Inc., of Lincoln, Nebraska, must replace a robotic Mig welder and is evaluating two alternatives. Machine A has a fixed cost for the first year of $75,000 and a variable cost of $16, with a capacity of 18,000 units per year. Machine B is slower, with a speed of one-half of A’s, but the fixed cost is only $60,000. The variable cost will be higher, at $20 per unit. Each unit is expected to sell for $28.
A)
What is the crossover point (point of indifference) in units for the two machines?
B) What is the range of units for which machine A is prefer- able?
C) What is the range of units for which machine B is preferable?
Explanation / Answer
Total cost = Fixed cost + Quantity * Variable cost
Machine A total cost = 75000+16Q
Machine B total cost = 60000 + 20Q
a)
Crossover point is the point where total cost is equal.
75000+16Q = 60000 + 20Q
Q = 3750
At Q = 3750 units the total costs of Machine A and B are equal. The crossover point = 3750
b) Range of units for which machine A is preferable from 0 to 3750 units
c) Machine B is preferable for 3,750 units and above units