Problem 1 Red Cat Firecrackers is considering whether to build a large or small

Question

Problem 1

Red Cat Firecrackers is considering whether to build a large or small factory to produce its firecrackers. Regardless of the production method, each bundle of firecrackers sells for $4.00. If the large factory is chosen, then the variable cost per bundle of firecrackers will be $0.50, while the fixed costs will be $300,000 and the annual depreciation and amortization amount will be $100,000. If the small factory is chosen, then the variable cost per bundle of firecrackers will be $1.75 while the fixed costs will be $100,000 and the annual depreciation and amortization amount will be $10,000.

Calculate the number of firecracker bundles for Red Cat such that the accounting operating profit is the same, regardless of the factory choice, that is, calculate the crossover level.

Explanation / Answer

Let the no.of firecracker bundles be x.

The accounting operating profit of big company is 4*x-0.5*x-300,000-100,000

The accounting operating profit of small company is 4*x-1.75*x-100,000-10,000

As the profit is same,

4*x-0.5*x-300,000-100,000=4*x-1.75*x-100,000-10,000

1.25x=290,000

x=232000

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