Ivanhoe's Candles will be producing a new line of dripless candles in the coming years and has the choice of producing the candles in a large factory with a small number of workers or a small factory with a large number of workers. Each candle will be sold for $10. If the large factory is chosen, the cost per unit to produce each candle will be $3.00. The cost per unit will be $7.50 in the small factory. The large factory would have fixed cash costs of $1.8 million and a depreciation expense of $300,000 per year, while those expenses would be $490,000 and $100,000, respectively in the small factory,
Calculate the accounting operating profit break-even point for both factory choices for Ivanhoe's Candles. (Round answers to nearest whole units, eg. 152.)
The accounting break-even point for large factory is _______ units and for small factory is _______ units.
Accounting break-even = (Fixed cost + Depreciation)/ (Price per unit – Variable cost per unit)
For large factory,
Accounting break-even = ($ 1,800,000 + $ 300,000)/ ($ 10 - $ 3)
= $ 2,100,000/$ 7 = 300,000 units
For small factory,
Accounting break-even = ($ 490,000 + $ 100,000)/ ($ 10 - $ 7.50)
= $ 590,000/$ 2.50 = 236,000 units
The large factory would have fixed cash costs of $1.8 million and a depreciation expense of $300,000 per year
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