a manager is making production planning a manager is making production planning

Question

a manager is making production planning a manager is making production planning a manager is making production planning a manager is making production planning Process X is estimated to have a fixed cost of $37,500 per year and a vanable cost of $60 per unt in year 1, decreasing by $5 per unit per year thereafter Process Y will have a fixed cost of $73,000 per year and a vanable cost of $10 per unit in year 1, increasing by $t year thereafter At an interest rate of 12% per year, how many units must be produced in year 6 for the two processes to break even? The number of units that must be produced is determined to be…

Explanation / Answer

Cost of producing n units in sixth year under process X ( At present values)

(37500+35n ) X 1.76

The factor 1.76 is used to denote time value for money in the sixth year at an interest rate of 12%.

Cost of producing n units in the sixth year under process Y ( At present values)

(73000 +15n)X 1.76

For achieving break even between two processes, the costs must be equal for n units

Comparing the two,

37500+ 35n = 73000+15n

n = 1775

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