Response to the following problem:
Letterman Office Service & Supply (LOSS) sells a variety of office equipment including the Executive office chair. The Executive sells for $200. Expected sales for next year are 5,000 units (sales estimates made by management are usually within 250 units). LOSS is considering a change in its manufacturing process. The accountants and engineers have developed the following two cost structures: Current Manufacturing System: $140 variable cost per unit and $180,000 in fixed costs. Alternate Manufacturing System: $40 variable cost per unit and $640,000 in fixed costs.
Question: Which plan would you choose for LOSS? Why? Would your answer change if sales are expected to decrease during the next several years?