A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two alternatives, A and B, have been identified, and the associated costs and revenues have been estimated. Annual fixed costs would be $36,000 for A and $31,000 for B; variable costs per unit would be $7 for A and $11 for B; and revenue per unit would be $18.

Requied:
a. Determine each alternativeâs break-even point in units.
b. At what volume of output would the two alternatives yield the same profit?
c. If expected annual demand is 10,000 units, which alternative would yield the higher profit?

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facundobuzzetti facundobuzzetti · Answer 1 · 2021-06-05T02:51:16+02:00

Answer:

Results are below.

Explanation:

Giving the following information:

Alternative A:

Fixed costs= $36,000

Unitary variable cost= $7

Selling price= $18

Alternative B:

Fixed costs= $31,000

Unitary variable cost= $11

Selling price= $18

First, we need to calculate the break-even point in units for each alternative:

Break-even point in units= fixed costs/ contribution margin per unit

Alternative A= 36,000 / (18 - 7)= 3,273

Alternative B= 31,000 / (18 - 11)= 4,429

Now, we equal the indifference point:

36,000 + 7x = 31,000 + 11x

x= number of units

5,000 = 4x

1,250 = x

The indifference point is 1,250 units.

Finally, 10,000 units are sold:

Alternative A:

Net income= 10,000*(18 - 7) - 36,000

Net income= $74,000

Alternative B:

Net income= 10,000*(18 - 11) - 31,000

Net income= $39,000