Saddam Toaster Co. is contemplating a modernization of its antiquated plant. It now sells its toasters for $20 each; the variable cost per unit is $8, and fixed costs are $840,000 per year.
a. Calculate the break-even quantity.
If the proposed modernization is carried out, the new plant would have fixed costs of $1,200,000 per year, but its variable costs would decrease to $5 per unit.
b. What will be the break-even point now?
c. If the company wanted to break even at the same quantity as with the old plant, what price would it have to charge for a toaster?
d. If the new plant is built, the company would want to decrease its price to $19 to improve its competitive position. At which quantity would profits of the old and the new plants be equal? (assuming the price of a toaster is $20 for the old plant but $19 for the new)
e. How much would the profit be at this quantity?
f. If sales are projected to reach 150,000 units per year in the near future, would you recommend construction of the new plant? Why or why not?.