A news clipping service is considering modernization. The company is currently using a manual process that has fixed costs of $400,000 per year and variable costs of $6.20 per item. The company is considering converting to a computerized process that has fixed costs of $1,300,000 per year and variable costs of $2.25 per item. a) If the same price is charged for either process, what is the annual volume beyond which the computerized process is more attractive

From 225,001 items, the computerized process is better.

Explanation:

Giving the following information:

Manual process:

Fixed costs= $400,000

Unitary variable cost= $6.20

Computerized process:

Fixed costs= $1,300,000

Unitary variable cost= $2.25

First, we need to structure the total cost formulas:

Manual process:

Total cost= 400,000 + 6.25x

x= number of items

Computerized process:

Total cost= 1,300,000 + 2.25x

x= number of items

Now, we equal both formulas and isolate x:

400,000 + 6.25x = 1,300,000 + 2.25x

4x = 900,000

x= 225,000 items

The indifference point is 225,000 items.

Prove:

Total cost= 400,000 + 6.25*225,000= $1,806,250

Total cost= 1,300,000 + 2.25*225,000= $1,806,250

From 225,001 items, the computerized process is better.

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