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.

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