Two different manufacturing processes are being considered for making a new product. The first process is less capital-intensive, with fixed costs of only per year and variable costs of per unit. The second process has fixed costs of but variable costs of only per unit. What is the break-even quantity, beyond which the second process becomes more attractive than the first?
the volume at which the second process becomes more attractive is units

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Two different manufacturing processes are being considered for making a new product. The first process is less capital-intensive, with fixed costs of only $49,700 per year and variable costs of $740 per unit. The second process has fixed costs of $391,000 but variable costs of only $160 per unit. a. What is the break-even quantity, beyond which the second process becomes more attractive than the first? the volume at which the second process becomes more attractive is units

answer :  At ≥ 589 units the second process becomes more attractive

Explanation:

A) Determine the breakeven quantity that makes the second process more attractive

the second process has a higher fixed cost of $391000

x = volume of sales that makes process 1 as profitable as process 2

sales = fixed cost + Total variable cost

profit = (( selling price ) * X ) - (variable cost * X ) - fixed cost

Assuming the profit made from process 1 = process 2

((selling price * X ) - ( variable cost of process 1 * X ) - fixed cost of process 1 =((selling price * X ) - ( variable cost of process 2 * X ) - fixed cost of process 2

hence ;

x = ( fixed cost of process 2 - fixed cost of process 1  ) / ((variable cost of process 1) - (variable cost of process 2 ))

   = ( 391000 - 49700 ) / ( 740 - 160 )

   = 588.44 units ≈ 588 units ( both process will yield same profitability

At ≥ 589 units the second process becomes more attractive

answer; capital structure decision;

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