Question

Senate Inc. is considering two alternative methods for producing playing cards. Method One involves using a machine with a Fixed Cost ( mainly Depreciation ) of $17,000 and Variable Costs of $1.00 per deck of cards. Method Two would use a less expensive machine with a Fixed Cost of only $5,000 , but it would require a Variable Cost of $1.50 per deck. The sales Price per deck would be the same under each method At what unit output level , Q , would the two methods provide the same Operating Income ( EBIT )

Answer 1

24,000 units

Step-by-step explanation:

Given that

Fixed Cost (mainly Depreciation)= $17,000

Variable Costs = $1.00 per deck

Fixed Cost = $5,000

The computation of operating income is shown below:-

Assume the number of units be x

Option 1

Total costs = $17,000 + x

Option 2

Total costs =$5,000 + $1.5x

So,

$17,000 + x=$5,000 + $1.5x

x × ($1.5 - 1) = ($17,000 - $5,000)

x = $12,000 ÷ $0.5

= 24,000 units