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To produce a component, any of the four processes can be adopted. Process A: Fixed cost = Rs. 20, Variable cost/piece = Rs. 4 Process B: Fixed cost = Rs. 50, Variable cost/piece = Rs. 3 Process C: Fixed cost = Rs. 60, Variable cost/piece = Rs. 2 Process D: Fixed cost = Rs. 70, Variable cost/piece = Rs. 1 Which of the following process is the most economical to produce 100 pieces in a batch?

To produce a component, any of the four processes can be adopted. Process A: Fixed cost = Rs. 20, Variable cost/piece = Rs. 4 Process B: Fixed cost = Rs. 50, Variable cost/piece = Rs. 3 Process C: Fixed cost = Rs. 60, Variable cost/piece = Rs. 2 Process D: Fixed cost = Rs. 70, Variable cost/piece = Rs. 1 Which of the following process is the most economical to produce 100 pieces in a batch? Correct Answer Process D

Concept:

Total Cost of Production (TC) = Fixed Cost + Variable Cost × No. of units.

Calculation:

Given:

Let demand be 'x' the number of units at which total cost of production for manufacturing.

Number of units, x = 100

Total Cost of Production = Fixed Cost + Variable Cost × No. of units.

Process A: Fixed cost = Rs. 20, Variable cost/piece = Rs. 4

(Total Cost)A = 20 + 100 × 4 = 420

Process B: Fixed cost = Rs. 50, Variable cost/piece = Rs. 3

(Total Cost)B = 50 + 100 × 3 = 350

Process C: Fixed cost = Rs. 60, Variable cost/piece = Rs. 2

(Total Cost)C = 60 + 100 × 2 = 260

Process D: Fixed cost = Rs. 70, Variable cost/piece = Rs. 1

(Total Cost)D = 70 + 100 × 1 = 170

Process D has a minimum total cost, hence process D is most economical.

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