34. Senate Inc. is considering two alternative methods for producing playing car

Question

34. Senate Inc. is considering two alternative methods for producing playing cards. Method 1 involves using a machine with a fixed cost (mainly depreciation) of $12,000 and variable costs of $1.00 per deck of cards. Method 2 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 sale price per deck would be the same under each method. At what unit output level would the two methods provide the same operating income (EBIT)?

a. 12,600
b. 14,000
c. 15,400
d. 16,940
e. 18,634

Explanation / Answer

EBIT is after depreciation so the fact that fixed cost is mainly depreciation is irrelevant. And since the sale price is the same for both methods, we just need to find the production level where expenses are the same. This is just a linear equation. 12000 + 1 * N = 5000 + 1.5 * N where N is number of decks 7000 = 0.5 * N N = 14000 decks

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