Buckeye Fan, Inc. must implement a manufacturing process that reduces the number of defects. Two processes have been identified that provide the same level of reduction. The first process is expected to incur $350,000 of fixed cost and add $50 of variable cost. The second process has fixed costs of $150,000 and adds $92 of variable cost.
What is the difference in total cost if the quantity produced is 10,000? $____________(Enter your response rounded to the nearest whole number.)
Buckeye Fan, Inc. faces the crucial task of implementing a manufacturing process to reduce the number of defects in their production. The company has identified two potential processes that offer the same level of defect reduction but differ in terms of cost structure. This essay will delve into a cost analysis to determine the difference in total cost when producing 10,000 units, aiding Buckeye Fan, Inc. in making an informed decision.
The first process comes with a fixed cost of $350,000 and an additional variable cost of $50 per unit produced. This means that for each of the 10,000 units manufactured, the variable cost will be 10,000 x $50 = $500,000. To find the total cost for this process, we add the fixed and variable costs together:
Total Cost (Process 1) = Fixed Cost + (Variable Cost per Unit x Quantity Produced) Total Cost (Process 1) = $350,000 + ($500,000) Total Cost (Process 1) = $850,000
The second process involves fixed costs of $150,000 and a variable cost of $92 per unit produced. Similar to the calculation for Process 1, we can calculate the total cost for Process 2:
Total Cost (Process 2) = Fixed Cost + (Variable Cost per Unit x Quantity Produced) Total Cost (Process 2) = $150,000 + ($92 x 10,000) Total Cost (Process 2) = $150,000 + $920,000 Total Cost (Process 2) = $1,070,000
Difference in Total Cost: To determine the difference in total cost between the two processes when producing 10,000 units, we subtract the total cost of Process 1 from the total cost of Process 2:
Difference in Total Cost = Total Cost (Process 2) – Total Cost (Process 1) Difference in Total Cost = $1,070,000 – $850,000 Difference in Total Cost = $220,000
In conclusion, when producing 10,000 units, Process 1 incurs a total cost of $850,000, while Process 2 incurs a total cost of $1,070,000. Therefore, the difference in total cost between the two processes is $220,000. This cost differential is a crucial factor that Buckeye Fan, Inc. should consider when deciding which manufacturing process to implement to reduce defects. It is evident that Process 1 is the more cost-effective option in this scenario, saving the company $220,000 in total costs. However, other factors such as the quality of the end product and production efficiency should also be taken into account before making a final decision.
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