Question

PLEASE EXPLAIN THE ANSWER STEP BY STEP

Automatic versus Manual Processing
Photo Station Company operates a printing service for customers with digital cameras. The current service, which requires employees to download photos from customer cameras, has monthly operating costs of $5,000 plus $0.20 per photo printed. Management is evaluating the desirability of acquiring a machine that will allow customers to download and make prints without employee assistance. If the machine is acquired, the monthly fixed costs will increase to $10,000 and the variable costs of printing a photo will decline to $0.04 per photo.

(a) Determine the total costs of printing 20,000 and 50,000 photos per month.

Units	Current Process	Proposed Process
20,000	$Answer	$Answer
50,000	$Answer	$Answer

(b) Determine the monthly volume at which the proposed process becomes preferable to the current process.
Answer

units

Answer 1

(a)

Units	Current Process	Proposed Process
20000	$ 9000( Note1)	$ 10800( Note2)
50000	$ 15000( Note1)	$ 12000( Note2)

Note 1: Current Process:

Fixed Cost=$ 5000

Variable expenses=$ 0.20/photo printed

                Therefore Total Cost= Fixed Cost+ Variable Cost

Total Cost of 20,000 units= $ 5000+ 20,000units*0.20/unit=$ 5000+$ 4000=$ 9000

Total Cost of 50,000 units= $ 5000+ 50,000units*0.20/unit=$ 5000+$ 10000=$ 15000

Note 2:Proposed Process:

Fixed Cost=$ 10000

Variable expenses=$ 0.04/photo printed

Therefore Total Cost= Fixed Cost+ Variable Cost

Total Cost of 20,000 units= $ 10000+ 20,000units*0.04/unit=$ 10000+$ 800=$ 10800

Total Cost of 50,000 units= $ 10000+ 50,000units*0.04/unit=$ 10000+$2000=$ 12000

(b)Monthly volume at which the proposed process is preferred to the current process is 50,000 units.(Note below)

Note:

Let the volume at which we are indifferent as to both the processes is to be taken as “X”

Therefore at this volume The Total costs of both the processes are the same

Therefore $5000+ 0.20 X =$ 10000+0.04X

    =0.16 X=$ 5000 i.e X=31250 units

Therefore proposed process is preferred at a volume of above 31250 units .

Thus at a volume of 50,000 units the proposed process is preferred.