Production capacity for one of its products

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Reference no: EM131389660

Your company wants to expand the production capacity for one of its products. Two plant sizes are under consideration -- one small, the other much larger.

Low-capacity plant:

TFC = $600,000

AVC = $60

Product selling price P = $90

High-capacity plant:

TFC = $1,500,000

AVC = $45

Product selling price P = $85

a) If your company builds the low-capacity plant and wants a 8% return (profit) on its fixed cost investment, how many units must it sell?

b) If your company builds the high-capacity plant and wants a 10% return (profit) on its fixed cost investment, how many units must it sell?

c) Why do you think that your company’s strategic planning team used a lower selling price when analyzing the high-capacity plant?

d) Comment on operating leverage in this problem – that is, how does breakeven Q change when higher FC and lower AVC are substituted for lower FC and higher AVC? Address the issue of operating risk in your answer.

Reference no: EM131389660

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