a) Breakeven point (BEP) = Annual fixed cost / (revenue per unit - variable cost per unit)
BEP for alternative A = 12600/(18.4-10.8) = 1658 units
BEP for alternative B = 25200/(18.4-7.2) = 2250 units
b) Volume of output for same profit (point of indifference) = (Fixed cost of B - Fixed cost of A)/(Variable cost of A - Variable cost of B)
= (25200-12600)/(10.8-7.2)
= 3500 units
c) Expected demand of 4000 is greater than the point of indifference (3500) . Therefore, alternative B would yield the higher profit (because its variable cost is lesser).
We can also determine this by calculating the profit for each alternative for this level of demand
Profit for alternative A = (18.4-10.8)*4000 - 12600 = $ 17,800
Profit for alternative B = (18.4-7.2)*4000 - 25200 = $ 19,600
Alternative B yields the higher profit.
Question 3: This question is from chapter 5. The question is worth 20 points. (Please show...
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