Problem: Operating Leverage
Ludlam Company and Kassandra Company both make school desks. They have the same production capacity, but Ludlam is more automated than Kassandra. At an output of 2,500 desks per year, the two companies have the following costs:
Ludlam Kassandra
Fixed costs . . . . . . . . . . . . . . . . . . . . . . . $137,500 $ 37,500
Variable costs at $20 per desk . . . . . . . . . . . 50,000
Variable costs at $60 per desk . . . . . . . . . 150,000
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . $187,500 $187,500
Unit cost (2,500 desks) . . . . . . . . . . . . . . . . $ 75 $ 75
Assuming that both companies sell desks for $100 each and that there are no other costs or expenses for the two firms, complete the following:
1. Which company will lose the least money if production and sales fall to 1,000 desks per year?
2. What would be each company's profit or loss at production and sales levels of 1,000 desks per year?
3. What would be each company's profit or loss at production and sales levels of 4,000 desks per year?