Carolina Vineyards is considering two alternative production methods for turning grapes into wine.One method calls for using a hand-operated press,while the other would employ a new,automated press.It has been estimated that the variable cost per bottle will amount to $2.00 using the old press and $0.50 using the new machine.If the new machine is purchased,fixed operating costs will equal $150,000,and interest charges will be $80,000.Fixed operating costs of $25,000 will be incurred if the company decides to use the old press,and interest costs will be zero because no debt will be needed.Assume that sales (in units)will be 100,000 bottles under the automated method and 75,000 units under the labor intensive method.What sales price per unit would cause Carolina to be indifferent between the two methods?
A) $2.00
B) $2.20
C) $4.00
D) $4.20
E) $6.00

Question

Quizplus · Accepted Answer

To calculate the break-even sales price, we need to find the total cost for each production method and set them equal to each other.

For the old method: 
Total cost = (variable cost per unit x number of units) + fixed operating costs 
Total cost = ($2.00 x 75,000) + $25,000 
Total cost = $175,000

For the new method: 
Total cost = (variable cost per unit x number of units) + fixed operating costs + interest charges 
Total cost = ($0.50 x 100,000) + $150,000 + $80,000 
Total cost = $230,000

Set the two equations equal to each other: 
$175,000 + sales price * 75,000 = $230,000 + sales price * 100,000

Solve for sales price: 
$175,000 + 75,000x = $230,000 + 100,000x 
25,000x = 55,000 
x = $2.20

Therefore, the break-even sales price is $2.20, making the new method the best choice as long as the sales price exceeds $2.20. Choice D is the correct answer.

Carolina Vineyards Is Considering Two Alternative Production Methods for Turning