A component can be produced by any of the four processes I, II, III and IV. The fixed cost and the variable cost for each of the processes are listed below. The most economical process for producing a batch of 100 pieces is

Process Fixed cost (in Rs.) Variable cost per piece (in Rs.)

I 20 3

II 50 1

III 40 2

IV 10 4

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III

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Solution

The correct option is A II

Process Fixed cost (in Rs.) Variable cost per piece (in Rs.) Total cost (Rs.)

I 20 3 20 + 3 × 100 = 320

II 50 1 50 + 1 × 100 = 150

III 40 2 40 + 2 × 100 = 240

IV 10 4 10 + 4 × 100 = 410

Total cost is minimum for process II, hence process II is most economical.

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