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30 August, 11:02

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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  1. 30 August, 12:17
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    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)
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