Question

redd inc. is considering two alternative methods for producing face masks. method 1 involves using a machine with a fixed cost of $5,000 and variable costs of $1.00 per mask. method 2 would use a less expensive machine with a fixed cost of only $1,000, but it would require a variable cost of $1.50 per mask. the sales price per mask would be the same under each method. at what unit output level would the two methods provide the same operating income (ebit)?

Answer 1

To find the unit output level where both methods have the same operating income (ebit), set the total costs of both methods equal to each other and solve for the sales price per mask.

Step-by-step explanation:

To determine the unit output level at which the two methods would provide the same operating income (ebit), we need to equate the total costs of both methods. Method 1 has a fixed cost of $5,000 and variable costs of $1.00 per mask, while method 2 has a fixed cost of $1,000 and variable costs of $1.50 per mask. Let's assume the sales price per mask is $x. For method 1, the total cost (TC1) would be $5,000 + $1.00x, and for method 2, the total cost (TC2) would be $1,000 + $1.50x. To find the unit output level where both methods have the same operating income, we set TC1 = TC2 and solve for x.