Mop and Broom Manufacturing has decided to produce a new type of mop. The mop can be made with...

Question:

Mop and Broom Manufacturing has decided to produce a new type of mop. The mop can be made with the current equipment in place. Estimates of fixed costs per year are $40,000, and the variable cost for each mop produced is $19. However, the company is considering the purchase of new equipment that would produce the mop more efficiently. The fixed cost would be raised to $51,000 per year, but the variable cost would be reduced to $16 per unit. The company still plans to sell the mops at $24 per unit. Should Mop and Broom produce the mop with the new or current equipment? Specify the volume of demand for which you would choose each process. (Calculate the following demand ranges. If a range goes to infinity enter "infinity". All boxes must be filled.)

From to
Old equipment
New equipment

Variable Cost :

Variable cost relates to the cost, which varies with the changes that are made in the quantity of services or goods that are produced by an organization. It is the total of marginal cost over all produced units.

Answer and Explanation:

Point of indifference between old and new equipment

Old equipment = new equipment

FIXED COST + VARIABLE COST * Q = FIXED COST + VARIABLE COST * Q

39,000 + 19Q = 48,000 + 15Q

4Q = 9,000

Q = 2,250

Q Total cost for old equipment Total cost for new equipment
2,000 77,000 78,000
2,250 81,750 81,750
5,000 1,34,000 1,23,000

From To
Old Equipment 0 2,250
New Equipment 2,250 infinity


Learn more about this topic:

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Variable Costing: Method, Formula & Advantages

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Chapter 13 / Lesson 5
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