Question - With the possibility of the US Congress relaxing restrictions on cutting old growth timber, a local lumber company is considering an expansion of its facilities. The company believes it can sell lumber for $0.18/board foot. A board foot is a unit of measure for lumber. The tax rate for the company is 30 percent. The company has the following two opportunities:
• Build Factory A with annual fixed costs of $20 million and variable costs of $0.10/board foot.
• Build Factory B with annual fixed costs of $10 million and variable costs of $0.12/board foot.
Required:
a. What is the break-even point in board feet for Factory A and Factory B?
b. If the company wants to generate an after-tax profit of $2 million with Factory B, how many board feet would the company have to process and sell?
c. If demand for lumber is uncertain, which factory is riskier? Why?