Problem
Laurie Kay was trying to choose between two manufacturing options. The firm for which she worked sold its product for $1 per unit. Although Laurie estimated that demand would be 200,000 units per year, she was not at all certain about this value because the environment was rather turbulent.
The costs of the two options were:
Alternative 1 Alternative 2
Material $0.35 per unit $0.30 per unit
Direct labour $0.25 per unit $0.15 per unit
Variable overhead $0.15 per unit $0.15 per unit
Fixed overhead $50,000 per year $100,000 per year
1. What is the break-even volume for each alternative?
2. What is the profitability of each alternative at annual sales levels of 180,000; 280,000; and 380,000?
3. At what point are the two alternatives economically identical.