Use the following to answer the questions below.
A company must decide on the type of equipment to buy in order to manufacture a new product line.The company can purchase an all-purpose machine,with fixed costs amounting to $20,000 per year,and it will cost $40 / unit to produce the new line on this machine.It can also buy a special-purpose machine,with fixed costs of $50,000 per year,and the per unit cost on this machine is $30.
-Refer to the instruction above.Which alternative should be selected if annual requirements are 5,000 units?
A)all-purpose machine
B)special-purpose machine
C)either machine;costs are the same for either option at 5,000 units
D)alternative to be selected;can't be determined with information given.

Question

Quizplus · Accepted Answer

For the all-purpose machine, the total cost to produce 5,000 units is:
Total cost = Fixed costs + Variable costs
Total cost = $20,000 + ($40 x 5,000)
Total cost = $220,000

For the special-purpose machine, the total cost to produce 5,000 units is:
Total cost = Fixed costs + Variable costs
Total cost = $50,000 + ($30 x 5,000)
Total cost = $200,000

Therefore, the special-purpose machine is the cheaper option for an annual requirement of 5,000 units.

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