SeptSeven has found that it is indifferent between purchasing a high-capacity vacuum component assembly machine or a lower capacity machine as long as sales are 1,900 units per month. The price of each calculator is $70. The high-capacity machine has cash expenses of $100,000 per month and depreciation and amortization expenses of $30,000 per month, while the alternative has cash expenses of $30,000 per month and depreciation and amortization expenses of $5,000 per month. Under the low-capacity alternative, variable costs per unit are $60. If the firm bases its decisions on the accounting operating profit break-even, then what is the variable cost per unit under the high-capacity alternative?
A) $10
B) $47
C) $60
D) $70

Question

Quizplus · Accepted Answer

In order to find the variable cost per unit for the high-capacity alternative, we need to use the accounting operating profit break-even equation:

Revenue - Variable costs - Fixed costs = Operating profit

Since we know that the firm is indifferent between the two alternatives as long as sales are 1,900 units per month, we can set the revenue for both alternatives equal to each other:

1900 x $70 = 266,000

For the lower capacity alternative, we know that variable costs per unit are $60. We also know that cash expenses are $30,000 per month and depreciation and amortization expenses are $5,000 per month. Therefore, fixed costs for the lower capacity alternative are:

$30,000 + $5,000 = $35,000

Using the break-even equation, we can solve for variable costs for the high-capacity alternative:

266,000 - Variable costs - $130,000 = $0

Variable costs = $136,000 / 1900 = $71.58

Since the question asks for the variable cost per unit, we round this to the nearest dollar and get:

Variable cost per unit under the high-capacity alternative = $72 - $70 = $2

Therefore, the best choice is to purchase the lower capacity machine since it has lower fixed and variable costs per unit compared to the high-capacity machine.

SeptSeven Has Found That It Is Indifferent Between Purchasing a High-Capacity