Two different manufacturing processes are being considered for making a new product. The first process is less capital-intensive, with fixed costs of only $50,000 per year and variable costs of $700 per unit. The second process has fixed costs of $400,000 but has variable costs of only $200 per unit. a. What is the break-even quantity beyond which the second process becomes more attractive than the first

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Business

Elvis Flowers

25 December, 15:18

Two different manufacturing processes are being considered for making a new product. The first process is less capital-intensive, with fixed costs of only $50,000 per year and variable costs of $700 per unit. The second process has fixed costs of $400,000 but has variable costs of only $200 per unit. a. What is the break-even quantity beyond which the second process becomes more attractive than the first

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Macey · Answer 1

700 units

Explanation:

fixed cost for first process (F₁) = $50000

variable costs of first process (V₁) = $700

fixed cost of second process (F₂) = $400000

variable cost of second process (V₁) = $200

break-even quantity (y) = ?

note : variable costs are costs that vary/change as the quantity of goods and services produced changes

A) the break-even quantity beyond which the second process can be calculated by equating the total costs of both processes

F₁ + V₁ (y) = F₂ + V₂ (y)

50000 + 700 y = 400000 + 200 y

500 y = 400000 - 50000

therefore y = 700 (break even quantity beyond which the second process is attractive)