War Eagle Distributing wants to determine the most efficient method of transporting its new product- The Charles Barkley Paperweight. This item has been offered for sale for several years, but Mr. Barkley's public persona and popularity have grown steadily, and the 6-year forecast calls for year 1 sales of 1,000 pallets, with year 2-6 sales increasing by 400 pallets each year. Estimated year 1 costs of two transportation options being considered are shown below.

Mode A Mode B
Variable Costs
Transportation Costs $240,000 $270,000
Inventory Cost $100,000 $30,000
Packaging Costs $120,000 $30,000
Fixed Cost $160,000 $420,000
Total Cost $620,000 $750,000

What is the Point of Indifference (where the total cost of each option is equal) in number of pallets?
a. 1,400
b. 1,800
c. 2,000
d. 2,400
e. 2,800

Respuesta :

Answer:

c. 2,000

Explanation:

Total Variable cost = transportation cost + inventory cost + packaging costs

Total variable cost Mode A = $240,000 + $ 100,000 + $ 120,000 = $460,000

Cost per pallets = 460,000 / 1000 = 4600

Total variable cost Mode B = $270,000 + $ 30,000 + $ 30,000 = $330,000

Cost per pallet = 330,000 / 1000 = 3300

The variable cost for both mode will be equal if the company plans to produce 2000 pallets.