A Firm Is Considering Three Capacity Alternatives: A, B, and C

question 46

Essay

A firm is considering three capacity alternatives: A, B, and C. 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:

Numerator

The top number in a fraction, representing the number of parts considered out of the whole.

Conversion Formula

A mathematical equation used to convert a quantity expressed in one set of units to another set of units.

Milligrams

A unit of mass in the metric system equal to one-thousandth of a gram.