Question1. In a slow year, Deutsche Burgers will manufacture 3 million hamburgers at a total cost of $3.9 million. In the good year, it can manufacture 6 million hamburgers at a total cost of $5.4 million.
a. What is average cost per burger when the firm manufactures 1.5 million hamburgers?
b. What is average cost when the firm manufactures 3 million hamburgers?
c. Why is average cost lower when more burgers are manufactured?
Question2. Dime a Dozen Diamonds makes synthetic diamonds through treating carbon. Each diamond can be sold for $140. The materials cost for the standard diamond is $40. The fixed costs incurred each year for factory upkeep and administrative expenditures are $216,000. The machinery costs $2.5 million and is depreciated straight-line over 10 years to the salvage value of zero.
a. What is accounting break-even level of sales in terms of number of diamonds sold?
b. What is NPV break-even level of sales assuming a tax rate of 35%, a 10-year project life, and a discount rate of 12%?