Problem 8-3 A small producer of machine tools wants to move to a larger building
ID: 350241 • Letter: P
Question
Problem 8-3 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 $220,000 and variable costs of $8,000 per unit; location B has annual fixed costs of $420,000 and variable costs of $6,000 per unit. The finished items sell for $19,000 each. a. At what volume of output would the two locations have the same total cost? Volume of outputunits b-1. For what range of output would location A be superior? (Enter your answer as a whole number. Do not include the indifference point in your answer.) Range of output to | b-2. For what range would B be superior? (Enter your answer as a whole number. Do not include the indifference point in your answer) Range of output or moreExplanation / Answer
8-3)
Total cost = Fixed cost + Variable cost
Let at 'x' units total cost will be same for both location A & B
Total cost of A = 220,000 + 8000*x
Total cost of B = 420,000 + 6000*x
a) For same:
220,000 + 8000*x = 420,000 + 6000*x
2000*x = 200,000
x = 100 units
b) A is superior from 0 to 99 units
c) B is superior from 101 or more