US CMA Part 2 · Chapter 5 · Question 12 of 15
Vickers Labs can produce a product with either of two processes. Process A has fixed costs of $200,000 and variable cost of $18 per unit. Process B, which is more automated, has fixed costs of $320,000 and variable cost of $12 per unit. At what volume are total costs equal, and which process is cheaper above that volume?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) 20,000 units; Process B is cheaper above that volume
Explanation
Set total costs equal: $200,000 + 18Q = $320,000 + 12Q, so 6Q = $120,000 and Q = 20,000 units. Above this volume the lower variable cost of Process B outweighs its higher fixed cost; for example at 30,000 units, A costs $740,000 and B costs $680,000.
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