Ranbow Inc.is about to introduce a new LED clock and has determined that it will charge $35 per clock. The firm must decide whether or not to purchase a high-capacity clock-making machine. If the high-capacity machine is selected, then the fixed costs for the firm will be $4,000 per year, with variable costs of $6 per clock. Otherwise the fixed costs will be $800, with variable costs of $16 per clock. Above what level of expected sales should Ranbow Inc. choose the high fixed cost alternative to maximize pretax operating cash flow?
A) 320 units
B) 352 units
C) 3200 units
D) 500 units

Question

Quizplus · Accepted Answer

To find the break-even point where the high fixed cost option becomes more favorable, set the total costs equal for both options and solve for the number of units. The equation is: $4000 + $6x = $800 + $16x$. Solving for x gives 320 units. Above this level, the high-capacity machine is more cost-effective.