8 pt X Company spent $5,700 on an engineering study that revealed that Product A

Question

8 pt X Company spent $5,700 on an engineering study that revealed that Product A could be manufactured more efficiently The new process would result in variable cost savings of $0.63 per unit and additional fixed costs of $3,980. Current variable costs per unit are 3.31, and current fixed costs are $11,890. Last year, X Company sold 3,300 units of Product A at a price of $12.99. At what unit sales level would X Company be indifferent between adopting the new process and not adopting it? 1. AO 3,429 BO 3,875 CO 4,378 DO 4,947 EO 5,591 FO 6,317

Explanation / Answer

Cost indifference point = differential fixed cost/differential variable cost per unit

Differential fixed cost = additional fixed cost of new process = $3,980

Differential variable cost per unit = savings in variable cost of adopting new process = $0.63 per unit

Hence, unit sales level for cost indifference = $3,980/$0.63 = 6,317 units

Alternatively,

Assuming the unit sales level to be X,

Total cost under existing process –

$3.31X + $11,800

Total cost under new process –

$2.68X + $15,780

At cost indifference point,

$3.31X + $11,800 = $2.68X + $15,780

$0.63X = $3,980

X = 3,980/0.63 = 6,317 units

At 6,317 unit sales level, the company would be indifferent between adopting the new process and not adopting it.

The variable cost per unit under new process is arrived at as follows,

Existing variable cost per unit – cost savings = $3.31 - $0.63 = $2.68

Total fixed cost under new process is arrived at as follows,

Existing fixed cost + additional fixed cost = $11,800 + $3,980 = $15,780

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