Q 1 (a) You are to select one of the processes P& against a given production tar
ID: 374686 • Letter: Q
Question
Q 1 (a) You are to select one of the processes P& against a given production target s ,variable costs/plece are as foilows umber For processes the Variable costs break up for processepiece Process Process Material costs Labour costs Electrieitylenergy costs 49 29 14Q 2Qr The process P has fixed costs of 20,000 Qr per year. Process Q has a fixed cost of 8000 Or per year. You are to answer for . At what production rate both P& Q will be equal. If the top bosses have decided that the production rate per vear will be 2750 units then which process you will recommend and why? .Suppose a third process R is also available which has a fixed cost of 28,000 Qr and variable cost of 5Qr/piece { material cost« 2,Labour costs! and energy cost#2). Then at which quantity you would like to move from Process P and Process Q. (Total 8 marks 2.5 marks each first two (2.5x2 5 for third one 3 marks)Explanation / Answer
Answer to 1st question :
Let the production rate at which total cost of process P and Q are equal = V
Total cost of a process = Fixed cost + Variable cost / unit x N
Therefore ,
Total cost for Process P = 20.000 Qr + ( 2 +2 + 4 QR) x V = 20,000 + 8.V Qr
Total cost for Process Q = 8000+ ( 4 + 2 + 14) x V = 8000 + 20.V Qr
Therefore ,
20,000 + 8.V = 8000+ 20.V
20.V – 8.V = 12,000
12.V = 12,000
V = 1000
Hence at production rate of 1,000 both P and Q are equal
Answer to 2nd question :
Target production rate = 2750 / year
Total production cost for 2750 units :
Process P = 20,000 + 8 X 2700 = 20,000 + 21,600 = 41,600 Qr
Process Q = 8000 + 20.V = 8000 + 20x 2750 = 8,000 + 55,000 = 63,000 Qr
Since total production cost for process P is less , we would recommend process P
Answer to 3rd question :
Let the required production quantity = N
Hence,
Total cost for process = Fixed cost + Variable cost/ unit x N
Therefore,
Total cost for Process P = 20.000 Qr + ( 2 +2 + 4 QR) x N = 20,000 + 8.N Qr
Total cost for Process Q = 8000+ ( 4 + 2 + 14) x N = 8000 + 20.N Qr
Total cost for Process R = 28,000 + 5.N Qr
To move to Process R, total cost for process R should be less than total cost of Process Q as well as Process Q
Therefore ,
Total cost for process R < Total cost for process P
Or, 28,000 + 5.N < 20,000 + 8.N
Or, 3.N > 8,000
Or, N > 8000/3
Or, N > 2666.66
Total cost for Process R < Total cost for Process Q
28,000 + 5.N < 8000 + 20.N
15.N > 20,000
Or, N > 1333.33
Thus,
At quantity 2667 and above, we would like to move from process P to process R
At quantity 1334 and above , we would like to move from process Q to process R
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