Question 1
Big John's Manufacturing currently produces its lead product on a machine that has a variable cost of $0.32 per unit, and fixed costs of $75,000. Big John is considering purchasing a new machine that will drop the variable cost to $.28 per unit, but has a fixed cost of $150,000. What is the cross-over point between the two machines?
Question 2
The local convenience store makes personal pan pizzas. Currently, their process makes complete pizzas, fully cooked, for the customer. This process has a fixed cost of $20,000, and a variable cost of $1.75 per pizza. The owner is considering a different process that can make pizzas in two ways: completely cooked (as before), or partially cooked and then flash frozen, for the customer to finish at home. This alternate process has a fixed cost of $24,000, but a lower variable cost (because much less energy is used in baking) of $1.25 per pizza.
a. What is the crossover point between the existing process and the proposed process?
b. If the owner expects to sell 9,000 pizzas, should he get the new oven?
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