A manufacturing firm is considering three alternatives for automation. They anti
ID: 347972 • Letter: A
Question
A manufacturing firm is considering three alternatives for automation. They anticipate the annual production volume to be 75,000 units. the costs for each alternative are as shown:
Alternative
1
2
3
Annual Fixed Costs
60,000
$180,000
$300,000
Variable Cost/Unit
$0.65
$0.55
$0.40
What sales price must be charged for alternative 2 to break even?
Select one:
a. Less than or equal to $2.00
b. More than $2.00 but less than or equal to $3.oo
c. More than $3.oo but less than or equal to $4.00
d. More than $4.00 but less than or equal to $5.00
Alternative
1
2
3
Annual Fixed Costs
60,000
$180,000
$300,000
Variable Cost/Unit
$0.65
$0.55
$0.40
Explanation / Answer
Break even point is the point where total cost is equal to total revenue
So for alternative 2,
Fixed cost (FC) = $180000
Variable cost (VC) = $0.55
Volume of output (Q) = 75000 units.
Let price = P
So the price that should be charged to break even can be calculated using the following equation
Total cost = Total revenue
=> FC + (Q x VC) = Q x P
=> 180000 + (75000 x 0.55) = 75000 x P
=> 180000 + 41250 = 75000P
=> 221250 = 75000P
=> P = 221250/75000
=> P = $2.95
So the answer is option b I.e more than $2.00 but less than or equal to $3.00
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