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
Using the expected value criterion,

The single purpose machine should be used because of the low expected
demand.The automatic machine should be used because of the high expected
demand.The semiautomatic machine should be used because it has the lowest
expected cost. The automatic machine has the lowest expected cost.Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (C) is correct.
The semiautomatic machine has an expected cost of $170,000 based on
an expected demand of 300,000 units [(.4 × 200,000) + (.3 × 300,000) +
(.2 × 400,000) + (.1 × 500,000)]. The single purpose machine has an
expected cost of $200,000 [($.60 × 300,000) + $20,000]. The automatic
machine has an expected cost of $180,000 [($.20 × 300,000) +
$120,000)]. Hence, the semiautomatic machine has the lowest expected
cost at the expected level of demand.