A company is considering three alternative machines to produce a new product. The cost
structures (unit variable costs plus avoidable fixed costs) fo... Accounting MCQs | Accounting MCQs

A company is considering three alternative machines to produce a new product. The cost
structures (unit variable costs plus avoidable fixed costs) for the three machines are shown as follows. The
selling price is unaffected by the machine used.
Single purpose machine $.60x + $20,000
Semiautomatic machine $.40x + $50,000
Automatic machine $.20x + $120,000
The demand for units of the new product is described by the following probability distribution.
Demand.. Probability
200,000 ..0.4
300,000 ..0.3
400,000 ..0.2
500,000 ..0.1
Ignoring the time value of money, the expected cost of using the semiautomatic machine is

$170,000 $130,000$210,000$250,000Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (A) is correct.
The expected demand is 300,000 units [(.4 × 200,000) + (.3 × 300,000) +
(.2 × 400,000) + (.1 × 500,000)]. Total expected cost is therefore
$170,000 [$50,000 fixed cost + ($.40 × 300,000) variable cost].