A Firm Is Considering Three Capacity Alternatives: A, B, AndC

question 86

Essay

A firm is considering three capacity alternatives: A, B, andC.Alternative A would have an annual fixed cost of $100,000 and variable costs of $22 per unit.Alternative B would have annual fixed costs of $120,000 and variable costs of $20 per unit.Alternative C would have fixed costs of $80,000 and variable costs of $30 per unit.Revenue is expected to be $50 per unit.
(A) Which alternative has the lowest break-even quantity?
(B) Which alternative will produce the highest profits for an annual output of 10,000 units?
(C) Which alternative would require the lowest volume of output to generate an annual profit of $50,000?

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Definitions:

Profitability Index

A calculation that compares the present value of future cash flows to the initial investment, used in capital budgeting to determine the desirability of an investment.

Investment Projects

Projects undertaken by individuals or companies involving the investment of capital for future gain.

Cash Outflows

Money or value flowing out of a business, typically related to expenses or investments.

Intangible Benefits

Benefits that cannot be easily quantified or directly measured, such as brand recognition or employee satisfaction.