Driehaus Manufacturing intends to increase capacity through the addition of new equipment. Two vendors have presented proposals. The fixed cost for proposal A is $62,000, and for proposal B, $35,000. The variable cost for A is $11, and for B, $14. The revenue generated by each unit is $20. a. What is the crossover point in units for the two options? b. At an expected volume of 8,300 units, which alternative should be chosen?

A. The crossover point in units is 9000 units

B. Alternate B or Proposal B should be chosen

Explanation:

a.

Let x be the number of units.

The profit equation for option 1 can be written as (20-11)x - 62000

The profit equation for option 2 can be written as (20-14)x - 35000

The crossover point is where both optons yield equal profit thus equation 1 = equation 2.

(20-11)x - 62000 = (20-14)x - 35000

9x - 62000 = 6x - 35000

9x - 6x = 62000 - 35000

3x = 27000

x = 27000 / 3

x = 9000 units

b.

At 8300units,

Profit from proposal A is = 9(8300) - 62000 = 12700

Profit from proposal B is = 6(8300) - 35000 = 14800

Thus option B is more profitable at this unit.

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