Question

Include graph interpretation below the graph. Make sure it is clear, complete, and easy to find.

A manager is trying to determine which of three production processes to implement to produce a component for a new product line. Process A would entail a variable cost of $17 per unit and an annual fixed cost of $150,000. Process B would entail a variable cost of $11 per unit and an annual fixed cost of $250,000. Process C would entail a variable cost of $20 per unit and an annual fixed cost of $180,000.

a. Develop three separate models in your spreadsheet to calculate Total cost for each process.

            The models must be flexible and able to calculate Total cost for any Quantity produced.

b. Create a Cost-Volume graph that shows total cost lines for all three options.

            (Volume should range from 0 to 30,000)

c. Write an interpretation of your graph

Answer 1

Part A:

In this case 30000 units have been considered as the annual production:

Total cost under three different processes:
Process A:
Number of units to be produced	30000
Variable cost per unit	17
Total variable costs (30000 x 17)			510000
Add: Annual Fixed costs			150000
Total cost of production			660000
Cost of product per unit (660000 /30000)		22
Process B
Number of units to be produced	30000
Variable cost per unit	11
Total variable costs (30000 x 11)			330000
Add: Annual Fixed costs			250000
Total cost of production			580000
Cost of product per unit (580000 /30000)	19.33333
Process C
Number of units to be produced	30000
Variable cost per unit	20
Total variable costs (30000 x 20)			600000
Add: Annual Fixed costs			180000
Total cost of production			780000
Cost of product per unit (780000 /30000)	26

Part B:

Part C:

The differences between the total costs under three different processes are mainly due to the differences in annual fixed costs and the differences in variable costs of production of each unit under three different processes. As can be seen that the variable cost of production each unit is lowest in Process B however, the annual fixed cost is highest in this processes out of the three processes mentioned. Similarly the lowest annual fixed costs is for Process A with $150000 however, the variable cost is relatively higher than the variable cost of Process B. Hence, the differences in total costs lines under three different processes.