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A news clipping service is considering modernization. The company is currently using a manual process that has fixed costs of $400,000 per year and variable costs of $6.20 per item. The company is considering converting to a computerized process that has fixed costs of $1,300,000 per year and variable costs of $2.25 per item. a) If the same price is charged for either process, what is the annual volume beyond which the computerized process is more attractive

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Answer:

From 225,001 items, the computerized process is better.

Explanation:

Giving the following information:

Manual process:

Fixed costs= $400,000

Unitary variable cost= $6.20

Computerized process:

Fixed costs= $1,300,000

Unitary variable cost= $2.25

First, we need to structure the total cost formulas:

Manual process:

Total cost= 400,000 + 6.25x

x= number of items

Computerized process:

Total cost= 1,300,000 + 2.25x

x= number of items

Now, we equal both formulas and isolate x:

400,000 + 6.25x = 1,300,000 + 2.25x

4x = 900,000

x= 225,000 items

The indifference point is 225,000 items.

Prove:

Total cost= 400,000 + 6.25*225,000= $1,806,250

Total cost= 1,300,000 + 2.25*225,000= $1,806,250

From 225,001 items, the computerized process is better.

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