Suppose That You Have Two Processes a and B for Producing

question 6

Multiple Choice

Suppose that you have two processes A and B for producing a widget. Process A has a fixed cost of $10,000 and per unit variable cost of $80.00. Process B has a fixed cost of $30,000 and the per unit variable cost is $40.00. The widget sells for $100 regardless of production Process used. During the next three years (your planning horizon for the widgets) you expect the economy to be pretty good with sales of widgets to be at least 700 units per year. You will

• A) be indifferent between choosing Process A and B, because they both have the same break-even point.
• B) choose Process A since it has a low fixed cost.
• C) choose Process B, since it has low variable cost.
• D) choose either Process A or B, since both will result in same profit for the next three years.
• E) choose Process B, since it will have higher net profit than Process A in the next three years.

---

Definitions:

Terms Of Sale

The conditions agreed upon by the buyer and seller regarding the delivery, payment, and other elements of a purchase transaction.

Credit Instrument Captive Finance Company

refers to a financial subsidiary company operated by a parent company primarily to provide financing for the sales and leasing of their products by offering credit to its customers.

Operating Cycle

The period it takes for a business to buy inventory, sell products, and collect cash from customers, essentially measuring the time between purchasing materials and receiving cash from sales.

Credit Period

The time duration given by a seller to a buyer to pay for a product or service, typically expressed in days.