A firm plans to begin production of a new small appliance. The manager has three
ID: 386008 • Letter: A
Question
A firm plans to begin production of a new small appliance. The manager has three options: Option 1: purchase the motors for the appliance from a vendor at $9 each; Option 2: produce them in house using technology A with an annual fixed cost of $40000 and a variable cost of $4 per unit; or Option 3: produce them in house using technology B with an annual fixed cost of $125000 and a variable cost of $3 per unit. The range of output for which Option 1 is best is units. The range of output for which Option 2 is best is units. The range of output for which Option 3 is best is units.
Explanation / Answer
Solution:
Vendor: $9 each
Process A:
Fixed Cost: $40,000 and Variable Cost: $4 per unit
9x = 40,000 + 4x
9x-4x = 40,000
5x = 40,000
x= 8000
Process B:
Fixed Cost: $1, 25,000 and Variable Cost: $3 per unit
9x = 1, 25,000 + 3x
9x-3x = 1, 25,000
6x = 1, 25,000
x= 20,833
Option 2 is the best to produce at $4 per unit with annual volumes of 8000.
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