A small producer of machine tools wants to move to a larger building, and has identified two alternatives. Location A has annual fixed costs of $210,000 and variable costs of $16,000 per unit; location B has annual fixed costs of $410,000 and variable costs of $12,000 per unit. The finished items sell for $22,000 each.
Required:
a. At what volume of output would the two locations have the same total cost?
b. For what range of output would location A be superior?
c. For what range would B be superior?

a)

Indifference point = Difference in fixed costs / Difference in variable cost per unit

= ($410,000 - $210,000) / ($16,000 - $12,000)

= 50 units.

b) and C)

I have selected 49 units for calculation as at 50 units, both locations are indifferent.

units4949

Location ALocation B

Sales 1,078,000 1,078,000

Less: Variable costs 784,000 588,000

Contribution 294,000 490,000

Less: Fixed Costs 210,000 410,000

Profit 84,000 80,000

As we can find, at 49 units, Location A gives more profits than Location B.

So, till 50 units, location A should be used and after 50 units location B should be used.

Explanation:

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