Senate Inc. is considering two alternative methods for producing playing cards. Method 1 involves using a machine with a fixed cost (mainly depreciation) of $12,000 and variable costs of $1.00 per deck of cards. Method 2 would use a less expensive machine with a fixed cost of only $5,000, but it would require a variable cost of $1.50 per deck. The sale price per deck would be the same under each method. At what unit output level would the two methods provide the same operating income (EBIT)?
A) 12,600
B) 14,000
C) 15,400
D) 16,940
E) 18,634

Question

Quizplus · Accepted Answer

To find the break-even point where both methods provide the same operating income, set the total costs equal: $12,000 + $1.00x = $5,000 + $1.50x. Solving for x gives x = 14,000 decks.