Suppose that you have two processes A and B for producing a widget. Process A has a fixed cost of $10,000 and per unit variable cost of $80.00. Process B has a fixed cost of $30,000 and the per unit variable cost is $40.00. The widget sells for $100 regardless of production Process used. During the next three years (your planning horizon for the widgets) you expect the economy to be pretty good with sales of widgets to be at least 700 units per year. You will
A) be indifferent between choosing Process A and B, because they both have the same break-even point.
B) choose Process A since it has a low fixed cost.
C) choose Process B, since it has low variable cost.
D) choose either Process A or B, since both will result in same profit for the next three years.
E) choose Process B, since it will have higher net profit than Process A in the next three years.

Question

Quizplus · Accepted Answer

Process B will have a higher net profit than Process A over the next three years due to the lower variable cost per unit, which becomes more advantageous as sales volume increases beyond the break-even point. Given the sales expectation of at least 700 units per year, the lower variable cost of Process B ($40) compared to Process A ($80) means that despite its higher fixed cost, Process B will yield a higher overall profit over the three-year period.

Suppose That You Have Two Processes a and B for Producing