Question

(B) Spectro Glass Company manufactures glass for office building in Arizona and Southern California. As a result of age and wear, a critical machine in the production process has begun to produce quality defects. Spectro Glass is considering replacing the old machine with a new machine, either brand A or brand B. The manufacturer of each machine has provided Spectro Glass these data on the cost of operation of its machine at various levels of output: Machine A Machine B Output (square yards) Estimated Total Cost Estimated Total Cost RM 70,000 100,000 115,000 137,000 146,000 RM 54,600 78,800 90,300 114,900 132,400 210,000 4,000 7,000 9,000 14,000 16,000 192,000 24,000

Answer 1

Solution: Computations for Machine A

a) Variable cost = (Highest cost - Lowest cost) / (Highest output - lowest output)

= ($210,000 - 54,600) / (24,000 - 4,000)

= $155,400 / 20,000

= $7.77 per square yard

Fixed cost = Total cost - Total variable cost

= $54,600 - 4,000×$7.77

= $23,520

(b). Cost equation for machine A :

Y = $23,520 + $7.77 X

where, y = Total cost of machine

X = Output (square yard)