Arktec manufacturing must choose between the following two capacity options: Fixed cost (per year) Varriable cost (per year)
Option 1 $500,000 $ 2 per unit
Option 2 $100,000 $10 per unit
A. What would the cost be for each option if demand level is 25,000 units per year? If it is 75,000 units per year? SHOW WORK
B. In general, which option do you think would be better as volume levels increase? as they decrease? why? SHOW WORK
C. What is the indifference point? SHOW WORK

See below

Explanation:

A. The cost for each for each option;

•If demand level is 25,000 units per year

Option 1 = $500,000 + ($2 × 25,000 unit

= $500,000 + $50,000

= $550,000

Option 2 = $100,000 + ($10 × 25,000 units)

= $100,000 + $250,000

= $350,000

• If the demand level is 75,000 units per year

Option 1 = $500,000 + ($2 × 75,000 units)

= $500,000 + $150,000

= $650,000

Option 2 = $100,000 + ($10 × 75,000 units)

= $100,000 + $750,000

= $850,000

B. As the volume level increases, option 1 will be better since the variable cost is lower. As the volume decreases, option 2 will be better as the fixed cost is lower.

C. The indifference point

= Differential fixed cost/Differential variable cost per unit

= [$500,000 - $100,000]/[$10 -$2]

= $400,000/$8

= 50,000 units

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