A company is evaluating which of two alternatives should be used to produce a product that will sell for $35 per unit. The following cost information describes the two alternatives. The break-even volume for Process B is
A) 50,000 units.
B) 62,500 units.
C) 30,000 units.
D) 20,000 units.

Question

A company is evaluating which of two alternatives should be used to produce a product that will sell for $35 per unit. The following cost information describes the two alternatives.  The break-even volume for Process B is
A) 50,000 units. 
B) 62,500 units. 
C) 30,000 units. 
D) 20,000 units.

Quizplus · Accepted Answer

To find the break-even volume, we need to set the total cost equal to the total revenue (since revenue = price * volume).

For Process B:

35x = 700,000 + 11x + 16x 
35x = 700,000 + 27x 
8x = 700,000 
x = 87,500

Therefore, the break-even volume for Process B is 87,500 units.

Comparing this to Process A, which has a break-even volume of 50,000 units, it is clear that Process B would need to sell more units to break even.

However, we also need to consider the profitability of each process. Using the contribution margin per unit, we can calculate the profit for each process:

Process A: 
35 - (10 + 8 + 2) = 15 
15 * 50,000 = 750,000

Process B: 
35 - (11 + 16) = 8 
8 * 87,500 = 700,000

Therefore, while Process B has a higher break-even volume, it is actually the more profitable choice since it has a lower total cost per unit and a higher contribution margin. Thus, the best choice is to use Process B.

A Company Is Evaluating Which of Two Alternatives Should Be