# Indifference Point
## Concept
Often management must choose between two alternatives — say two technologies, two machines, or two suppliers — each with a different combination of variable and fixed costs.
- Option A: low fixed cost, high variable cost per unit
- Option B: high fixed cost, low variable cost per unit
The Indifference Point is the level of output (or sales) at which the total cost (Fixed + Variable) under both options is identical — i.e., management is indifferent.
## Formula
$$\text{Indifference Point (units)} = \frac{\text{Difference in Total Fixed Cost}}{\text{Difference in Variable Cost per unit}}$$
## Decision Rule
| Actual Output | Choose |
|---|---|
| Above Indifference Point | Option with LESS variable cost (higher fixed cost) — lower variable cost saves more than the extra fixed cost |
| Equal to Indifference Point | Any option — both yield identical cost |
| Below Indifference Point | Option with LESS fixed cost (higher variable cost) — savings on fixed cost outweigh the extra variable cost |
## Logic
For each unit produced above the indifference point, the option with the lower variable cost saves money. Below the indifference point, those savings haven't accumulated enough to offset the extra fixed cost.