Process A has fixed costs of $1000 and variable costs of $5 per unit. Process B has fixed costs of $500 and variable costs of $10 per unit. The crossover point (point of indifference) between process A and process B is: (Select the best answer.)(Points : 1)
30 Units
50 Units
100 Units
$1500
$3000
The correct answer and explanation is :
To determine the crossover point (or point of indifference) between two processes, we need to find the level of output (in units) at which the total costs of both processes are equal.
Step 1: Understand the cost structures for both processes
- Process A:
- Fixed Costs = $1000
- Variable Costs per unit = $5
- Total cost for Process A = ( \text{Fixed Costs} + \text{Variable Costs} \times \text{Units} )
- Process B:
- Fixed Costs = $500
- Variable Costs per unit = $10
- Total cost for Process B = ( \text{Fixed Costs} + \text{Variable Costs} \times \text{Units} )
Step 2: Set up the cost equations for both processes
- Total cost for Process A = ( 1000 + 5x ) where ( x ) is the number of units produced.
- Total cost for Process B = ( 500 + 10x ) where ( x ) is the number of units produced.
Step 3: Solve for the crossover point
At the crossover point, the total costs for Process A and Process B are equal. Set the two cost equations equal to each other:
[
1000 + 5x = 500 + 10x
]
Now, solve for ( x ):
- Subtract 500 from both sides:
[
500 + 5x = 10x
]
- Subtract 5x from both sides:
[
500 = 5x
]
- Divide both sides by 5:
[
x = 100
]
Step 4: Interpretation
The crossover point occurs when the production reaches 100 units. At this point, the total costs of both processes are identical. If fewer than 100 units are produced, Process B will be less expensive. If more than 100 units are produced, Process A becomes the more cost-effective option.
Answer: 100 Units
This is the point where the total costs of Process A and Process B are equal, meaning both processes are “indifferent” at this production level.