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A component can be produced by any of the four processes, I, II, III and IV. Process I has fixed cost of Rs. 20 and variable cost of Rs. 3 per piece. Process II has a fixed cost of Rs. 50 and variable cost of Rs. 1 per piece. Process III has a fixed cost of Rs. 40.00 and variable cost of Rs. 2 per piece. Process IV has fixed cost of Rs. 10 and Variable cost Rs. 4 per piece. If company wishes to produce 100 pieces of the component, from economic point of view it should choose
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- Process I
- Process II
- Process III
- Process IV
Correct Option: B
Total cost = Fixed Cost (FC) + Number of piece (n) × Variable Cost per piece (VC)
TC = FC + (n) x V.C
For I
TCI = 20+ (100) 3 = 320
For II
TCII = 50 + (100) 1 = 150
For III
TCIII = 40 + 100 (2) = 240
For IV
TCIV = 10 + 100 (4) = 410
So from economical point of view, one should chose process II
