Problem
BBC Inc. will be producing a new line of smart robot. If the large factory is chosen, the cost per unit to produce each unit will be $190 while the cost per unit will be $240 for the small factory. The large factory would have fixed cash costs of $358,000,000 and a depreciation expense of $4,200,000 per year, while those expenses would be $178,000,000 and $2,100,000 in the small factory. Unit price is $780 for both projects.
1. If EBIT is $184,000,000, calculate the pretax cashflow operating leverage for both factory choices for BBC Inc.
2. Interpret the results that you got from question (1). Based on your interpretation, which one is riskier and why?
3. Calculate the number of unit sales for which the pretax operating cash flow is the same, regardless of the factory choice. Interpret the result.