The cost of manufacturing a single mechanical tool is $500 plus $1 in labor. Ano
ID: 356074 • Letter: T
Question
The cost of manufacturing a single mechanical tool is $500 plus $1 in labor. Another alternative is to manufacture the same product by an automated process that costs $8,000, with a $0.50 per-unit cost. With an annual production rate of 2000 units, how long will it take to reach the break-even point
The cost of manufacturing a single mechanical tool is $500 plus $1 in labor. Another alternative is to manufacture the same product by an automated process that costs $8,000, with a $0.50 per-unit With an annual production rate of 2000 units, how long will it take to reach the break-even pointExplanation / Answer
At the breakeven point, total cost of both the alternatives will be same.
Total cost = fixed cost + Variable cost x Volume
Let, Q = break even point volume
Total cost of alternative 1 = $500 + $1 x Q
Total cost of alternative 2 = $8000 + $0.5 x Q
At BEP, $500 + Q = $8000 + $0.5Q
0.5Q = 8000-500 = 7500
Q = 15000 units
Break even point volume between both alternatives = 15,000 units
Annual Demand = 2000
Break even period = Breakeven point volume/Annual Demand = 15000/2000 = 7.5 years
Thus, it will take 7.5 years to reach breakeven point
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