Which alternative would you recommend?

A parts manufacturer plans to replace its existing facility with a new one The management is considering two possible capacities for the new facility: 200,000 or 250,000 units per year The 200,000 unit plan would have an annual fixed cost of $40 million and a per unit production cost of $20 The 250,000 unit plan would have an annual fixed cost of $6 million and a per unit cost of $15 The parts will be sold for an average price of $60 per unit

 

a What would be the break even point for each capacity alternative

b Suppose that the company projects its sales to be 220,000 units per year Which alternative would you recommend? – For this part calculate the annual profit in each case

Solution:

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