Process A requires equipment with a first cost of 300,000 QAR having a salvage v

Question

Process A requires equipment with a first cost of 300,000 QAR having a salvage value of 100,000 QAR in 5 years. The fixed cost per year is 28,806 QAR with a variable cost of 200 QAR/unit. On the other side, Process B requires no purchase of equipment, but will involve a cost of 1,000 QAR/unit. Determine the number of units that must be manufactured per year in order for the two processes to break even. Use an interest rate of 5% per year and the AW relations as function of common variable for each alternative.

Explanation / Answer

Let the number of units manufactured be "x"

Therefore, in order to breakeven the cost of both the procesess must be equal

cost of process A will be:-

Depreciation= 300000-100000/5 = 40,000

Fixed cost= 28,806

Variable cost= 200x

Cost of Process B will be 1000x

Now, Equating Process A and Process B

1000x= 40000+ 28.806+200x

so x=86 (Approx)

86 Units should be sold to make the cost break even.

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