With possibility of the US Congress relaxing restrictions on cutting old growth timber, a local lumber company is considering an expansion of its facilities. The company believes it will sell lumber for $0.18/board foot. A board foot is a unit of measure for lumber. The tax rate for the company is 30 %. The company has the subsequent two opportunities:
• Build Factory A with annual fixed costs of $20 million and variable costs of $0.10/board foot.
• Build Factory B with annual fixed costs of $10 million and variable costs of $0.12/board foot.
Required:
a. Find the break-even point in board feet for Factory A and Factory B?
b. If the company wants to create an after-tax profit of $2 million with Factory B, how many board feet would the company have to process and sell?
c. If demand for lumber is uncertain, which factory is riskier and Why?