Question

The Company Liv is considering three process alternatives for its new investment in Ottawa.
Process A has an $80K fixed cost and $4 variable cost for each product (unit) produced.
Process B has a $120K fixed cost and $2 variable cost for each product (unit) produced.
Process C has a $200K fixed cost and $1 variable cost for each product (unit) produced.

1. Draw the graph of fixed, variable and total costs of all processes in an MS Excel file. (2 points)
2. Which process option will cost least in total if Company Liv is planning to produce exactly 3000 units? (1 point)
3. Up to how many units Process A is the most feasible (cheapest) option? (1 point)
4. At how many units Process A and Process B have equal total costs? (1 point)
5. How many more units can be produced if Process B is selected instead of Process C when the total budget is $220,000? (1 point)

Please show your graph and answers in one MS Excel file.

Answer 1

1.

2.

Note that the volume Q = 3000 falls in the range [0, 20000]. So, Process-A is the cheapest option.

3.

Up to a value of Q less than 20K units, process-A will give the cheapest option.

4.

At Q=20K, Process-A and Process-B gives the equal total cost

5.

Budget = 220K

TC(B) = 120 + 2Q = 220K which gives Q = 50K
TC(C) = 200 + 1Q = 220K which gives Q = 20K

So, using Proces-B, a total budget of 220,000 will give 50K - 20K = 30K more units over Process-C.