As a result of many phases of trial and error, two methods for producing playing

Question

As a result of many phases of trial and error, two methods for producing playing cards have been identified by the Modest Mouse Company. One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards. The other method would use a less expensive machine (fixed cost = $2,000), but it would require greater variable costs ($1.40 per deck of cards). If the selling price per deck of cards will be the same under each method, at what level of output will the two methods produce the same net operating income (EBIT)?

Explanation / Answer

by first method, using a machine the cost is as follows:

machine cost= $10,000

variable cost per deck of cards= $1

second method occuring the following costs

fixed cost= $2000

variable cost for deck of cards= $1.4

the breakeven with same EBIT is producing 20,000 deck of cards

the cost by first method= $10,000+ $20,000= $30,000

the cost by second method= $2000 + ($1.4X 20,000)

= $2000 + $28,000= $30,000

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