Mary is considering purchasing a machine from two suppliers. Supplier A\'s machi
ID: 359980 • Letter: M
Question
Mary is considering purchasing a machine from two suppliers. Supplier A's machine has an annual
fixed cost of $10,000 and a unit variable cost of $2.10. Supplier B's machine has an annual fixed
cost of $16,000 and a unit variable cost of $1.50. How large should Mary's annual demand be in
order to make Supplier B's machine the better choice?
Explanation / Answer
Answer:
If we assume that the demand is for 10,000 units than,
For Supplier A
F.C = 10,000
V.C= 2.1
Demand is 10,000 units
Than, V.C* Units = 2.1*10,000= 21,000
Adding F.C= 21,000+10,000= 31,000
For Supplier B
F.C= 16,000
V.C= 1.5
Demand is 10,000 units
Than, V.C* Units = 1.5*10,000= 15000
Adding, F.C = 15000+ 16000= 31,000
Therefore, Mary's annual demand should be more than 10,000 units in order to make Supplier B's machine the better choice.