A company is considering two options for the production of a part needed downstream in the manufacturing process. Particulars are as follows:
Specialized automation: Fixed Costs = $9,000 / month Variable Cost / Unit = $2
General automation: Fixed Costs = $3,000 / month Variable Cost / Unit = $5
1. What is the monthly break-even quantity for choosing between the two automation approaches?
a. 1,000 units
b. 2,000 units
c. 6,000 units
d. 12,000 units
2. For a monthly volume of 3,000 units, which automation approach should be chosen?
a. Specialized automation
b. General automation
c. Either approach is acceptable, because costs are the same for either option at 3,000 units.
d. Can’t be determined with information given.

1= B

2= A

Explanation:

Giving the following information:

Specialized automation:

Fixed Costs = $9,000 / month

Variable Cost / Unit = $2

General automation:

Fixed Costs = $3,000 / month

Variable Cost / Unit = $5

First, we need to structure the costs formula:

Specialized automation:

Total cost= 9,000 + 2x

x= production

General automation:

Total cost= 3,000 + 5x

x= production

To calculate the indifference point, we need to equal both formulas:

9,000 + 2x = 3,000 + 5x

6,000=3x

2,000= x

The indifference point is 2,000 units.

Finally, we need to calculate which process is more convenient for 3,000 units:

Specialized automation:

Total cost= 9,000 + 2*3,000= $15,000

General automation:

Total cost= 3,000 + 5*3,000= $18,000

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