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CMA Intermediate · Operations Management and Strategic Management · Production Planning and Control

A firm needs an annual output of 24,000 units. Machine A has fixed cost of Rs 3,00,000 per year and variable cost of Rs 20 per unit. Machine B has fixed cost of Rs 1,50,000 per year and variable cost of Rs 30 per unit. At the required output, which choice is cheaper and by how much?

Machine A is cheaper by Rs 90,000. Its total cost at 24,000 units is Rs 3,00,000 plus Rs 4,80,000, or Rs 7,80,000, while Machine B costs Rs 1,50,000 plus Rs 7,20,000, or Rs 8,70,000. Beyond the 15,000-unit crossover, the lower variable cost of A prevails.

  1. AMachine A cheaper by Rs 90,000Correct
  2. BMachine B cheaper by Rs 90,000
  3. CMachine A cheaper by Rs 60,000
  4. DMachine B cheaper by Rs 1,50,000

Explanation

Cost A = 3,00,000 + 24,000 x 20 = 7,80,000. Cost B = 1,50,000 + 24,000 x 30 = 8,70,000. A is cheaper by 90,000. Break-even is at 15,000 units (1,50,000/10), so above that A wins; the distractor naming B ignores the variable cost.

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