Your company plans to produce a new product, a wireless computer mouse. Two mach

Question

Your company plans to produce a new product, a wireless computer mouse. Two machines can be used to make the mouse, Machines A and B. The price per mouse will be $25.00 regardless of which machine is used. The fixed and variable costs associated with the two machines are shown below. At the expected sales level of 75,000 units, how much higher or lower will the firm's expected EBIT be if it uses Machine B with high fixed costs rather than Machine A with low fixed costs, i.e., what is EBITB - EBITA?

                           Machine A   Machine B

Price per mouse (P)           $25.00      $25.00

Fixed costs (F)             $100,000    $400,000

Variable cost/unit (V)        $15.25       $9.00

Exp. unit sales (Q)           75,000      75,000

Explanation / Answer

EBITB = $25.00*75000 - $400,000 - $9.00*75,000 = 800,000

EBITA = $25.00*75000 - $100,000 - $15.25*75,000 = 631,250

EBITB - EBITA = 168,750

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