A small producer of machine tools wants to move to a larger building, and has id

Question

A small producer of machine tools wants to move to a larger building, and has identified two alternatives. Location A has annual fixed costs of $215,000 and variable costs of $10,000 per unit; location B has annual fixed costs of $415,000 and variable costs of $9,000 per unit. The finished items sell for $15,000 each.

For what range of output would location A be superior? (Enter your answer as a whole number. Do not include the indifference point in your answer.)

For what range would B be superior? (Enter your answer as a whole number. Do not include the indifference point in your answer.)

Explanation / Answer

a)

Let the volume of output be X at which total costs will be equal.

We have to equate the costs of two locations at volume X

So,

$215,000+ $10,000 X = $415,000 + $9,000 X

So, $1,000 X = $200,000

So, X = 200 units

So, at 200 units, the two locations will have the same total cost.

b-1) Since fixed cost of location A is lesser than location B, and variable costs are more in A than B, the total costs will be lower for a range of output from 0 to 199

b-2) Location B will be superior for a range of output of 201 or more.

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