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Hi John,
Why the answer regarding point 4 of the question, in part a of the answer, to find the machine set up cost, he did x 500/400 instead of the other way round (x 400 / 500)?
If it was currently made in 500 batches, isn’t it that the provided current total annual costs based on 500 batches instead of 400?
Thank you in advance.
The answer is correct. If they have to make them in smaller batches then they will need more set-ups, which will make the variable set-up costs higher in total.
For example, they are making 80,000 screens and currently they need 80,000/500 = 160 setups. In future they will make in batches of 400, and so they will need 80,000/400 = 200 set-ups. So the variable cost will change from 22,000 in total to 22,000 x 200/160 = 27,500 in total.
I hope this makes it clearer 🙂
Yes, I understood it perfectly now. I prefer this method you showed me. The other one got me mixed up.
Thanks so much.
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