Carolina Vineyards Is Considering Two Alternative Production Methods for Turning

question 20

Multiple Choice

Carolina Vineyards is considering two alternative production methods for turning grapes into wine.One method calls for using a hand-operated press,while the other would employ a new,automated press.It has been estimated that the variable cost per bottle will amount to $2.00 using the old press and $0.50 using the new machine.If the new machine is purchased,fixed operating costs will equal $150,000,and interest charges will be $80,000.Fixed operating costs of $25,000 will be incurred if the company decides to use the old press,and interest costs will be zero because no debt will be needed.Assume that sales (in units) will be 100,000 bottles under the automated method and 75,000 units under the labor intensive method.What sales price per unit would cause Carolina to be indifferent between the two methods?

• A) $2.00
• B) $2.20
• C) $4.00
• D) $4.20
• E) $6.00

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Definitions:

Close Substitutes

Products or services that can easily replace each other in the eyes of the consumer, having nearly the same utility or function.

Productivity

A measure of the efficiency of production, often calculated as the ratio of output to inputs used in the production process.

Derived Demand

The demand for a good or service that arises from the demand for another good or service.

Final Product

A final product refers to a good or service that has completed all stages of production and is ready for sale or consumption.