A2: CH 2--Process Strategy-Nawaf Basudan https://xlitemprod.pearsoncmg.

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Instructor: John Bing

Student: Nawaf Basudan Assignment: A2: CH 2--Process
Course: BUA 345--Operations & Supply
Date: 05/25/19 Strategy
Chain Management

Two different manufacturing processes are being considered for making a new product. The first process is less
capital-intensive, with fixed costs of only $52,000 per year and variable costs of $710 per unit. The second process has
fixed costs of $406,000 but variable costs of only $220 per unit.

a. What is the break-even quantity, beyond which the second process becomes more attractive than the first?

The total cost of producing Q units of the product is given by:

Total cost = F + c Q,

where F is the fixed cost, c is the variable cost per unit, and Q is the volume produced. The production volume at which
both manufacturing processes are indifferent can be solve from:

F1 + c1 Q = F2 + c 2 Q,

where F1 , c1 are the fixed cost and variable cost per unit of manufacturing process one, and F2 , c2 are the fixed cost and
variable cost per unit of manufacturing process two.

Solving for Q,

F2 − F1
Q= ,
c1 − c2

$406,000 − $52,000
Q= = 722 units.
$710 − $220

The production volume at which the second manufactuing process becomes more attractive is 722 units.

b. If the expected annual sales for the product is 820 units, which process would you choose?

Since the production volume at which the second manufactuing process becomes more attractive is 722 units and the
expected annual sales for the product is 820 units, you should choose the second manufactuing process.

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