Substituting Capital For Labor
A company is currently producing and selling 40,000 units of its product. The product sells for $10, has variable production costs of $6 per unit, and total fixed costs of $100,000. An industrial engineer has proposed that the company substitute capital for labor by installing new automated production equipment. The proposed change will increase total fixed costs by $50,000 and, at the same time, will reduce unit variable production cost by $2. The selling price will remain the same. What effect on the break-even point would this change have? Do you recommend that the change be made? Why or Why not?