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# Fixed Cost & Variable Cost & Demand Problem

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How to calculate demand requirements for Alternative B. See attached file for full problem description.

## SOLUTION This solution is FREE courtesy of BrainMass!

Part a:
For plan A: Total variable cost per day = total demand per day (yd3)*variable cost per yd3
= (20000 + 7000 + 6000)*\$1.5 = \$49,500
Fixed cost per day = \$20,000
Total cost for plan A per day = 49500 + 20000 = \$69,500

For plan B: Total variable cost per day = demand at site 1*variable cost for site 1 + demand at site 2*variable cost for site 2 + demand at site 3*variable cost for site 3
= 20000*\$1.0 + 7000*\$1.1 + 6000*\$1.2 = \$34,900
Total fixed cost per day = 15000 + 7000 + 7000 = \$29,000
Total cost for plan B per day = 34900 + 29000 = \$63,900

Select plan B

Part b:
If sales were to increase to capacity total demand for plan A = capacity of plan A = 40000
Demand for plan B = capacity at site 1 + capacity are site 2 + capacity at site 3
= 24000 + 8000 + 8000 = 40000
For plan A total cost per day = 40000*\$1.5 + \$20,000 = \$80,000 (see computations in part a)
For plan B total cost per day = 24000*\$1.00 + 8000*\$1.1 + 8000*\$1.2 + \$29000 = \$71,400
(Note that capacity is used in place of demand compared to part a)

Select plan B

Part c:
Variable cost for plan A = \$1.5.
Iso-cost lines mean slopes are same, but total cost is different. Slope is decided by variable cost per yd3 and total cost is decided by fixed and variable cost*quantity. Slope of cost line for plan A is \$1.5 (variable cost). Slope of cost line for plan B is total variable cost per day i.e. 24000*\$1.00 + 8000*\$1.1 + 8000*\$1.2 = \$42,400 divided by total demand i.e. 40000, hence slope of cost line for plan B = \$42,400/40000 = \$1.06.
Variable cost per yd3 for plan B may increase by slope of cost line for plan A - slope of cost line for plan B = \$1.5 - \$1.06 = \$0.44 (increase in variable cost for plan B).

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