Crossover Analysis

An electronics firm is considering two different manufacturing processes to make a new product. The first process is less capital-intensive, with fixed costs of $200,000 per year and variable costs of $2,400 per unit. The second (more capital-intensive) process has fixed costs of $1,000,000 per year but has variable costs of $450 per unit. The firm expects to sell the product at $3,200 per unit.

Question 34

What is the crossover quantity?Answer with a whole number.

Question 35

What is the crossover cost? Answer with a whole number.

Question 36

If the expected annual sales for the product is 1,000 units, which process would you choose?

• First process with fixed costs of $200,000
• Second process with fixed costs of $1,000,000
• They are indifferent between the processes because variable cost is less than price in both cases.
• We do not have enough information to make the decision.

Question 37

If the firm must process 1,500 units per year, what value must the fixed costs for the more capital-intensive process be for the firm to be indifferent between the two processes?Answer with a whole number.

Question 38

If the firm must process 1,500 units per year, what value must the variable costs for the less capital-intensive process be for the firm to be indifferent between the two processes? Answer with a whole number.

Question 39

What is the break-even quantity for the less capital-intensive process? Answer with a whole number.

Question 40

What is the break-even quantity for the more capital-intensive process? Answer with a whole number.

Question 41

For the more capital-intensive process, if the firm must process 1,500 units per year, how high must the variable costs be for the firm to break-even?? Answer to two decimal places.

Question 42

Now suppose that the firm is considering a third option - outsourcing the product at a cost of $2,900 per unit. Identify the approximate range over which outsourcing provides the lowest cost.What is the bottom of the range that it is the lowest cost?

Question 43

Now suppose that the firm is considering a third option - outsourcing the product at a cost of $2,900 per unit. Identify the approximate range over which outsourcing provides the lowest cost.What is the top of the range that it is the lowest cost?Answer with a whole number.If it is unbounded (i.e. there is not a top of the range) enter the number 2000000.

Question 44

If the firm anticipates producing 1,000 units per year, it should outsource.

• True
• False