Break even analysis, (ignoring time value of money) question The XYZ Company is

Question

Break even analysis, (ignoring time value of money) question

The XYZ Company is faced with three proposed methods for making one of their products. Method A involves the purchase of a machine for $100,000. It will have a seven-year life, with a zero salvage at that time. Using Method A involves additional costs of $5.00 per unit of product produced per year. Method B involves the purchase of a machine for $200,000. It will have a salvage value of $40,000 if disposed of after seven year. Using Method B involves additional costs of $3.00 per unit of product produced per year. Method C involves the purchase of a machine for $160,000. It will have a salvage value of $40,000 if disposed of after seven years. Additional costs of $4.00 per unit of product produced per year arise when Method C is used. Ignoring the time value of money (discounted cas flow), for what range of annual production volume values is each method preferred? Clearly show the method you have used, and state and justify any assumptions that you have made. Discuss any significant risks that are associated with your conclusion.

Explanation / Answer

Indifference point between A and C = 20000/1 = 20000 units

Indifference point between C and B = 40000/1 = 40000 units

Indifference point between A and B = 60000/2 = 30000 Units

Unit less than 10000 should be manufactured by A.

Unit greater than 40000 should be manufatcired by B

Units between 10000 to 40000 should be manufatured by C.

Method A Method C Method B Cost -100000 -160000 -200000 salvage value 0 40000 40000 Net cost -100000 -120000 -160000 Per unit additional cost 5 per unit 4 per unit 3 per unit Comparative cost saving Net cost net cost C TO A 20000 net cost B TO C 40000 net cost B TO A 60000 Per unit additional cost net cost C TO A 1 net cost B TO C 1 net cost B TO A 2

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.