Sechssonic has found that it is indifferent between purchasing a high-capacity vacuum sealing machine or a lower capacity machine as long as sales are 200 units per month. The price of each sealed beam light is $50. The high-capacity machine has cash expenses of $10,000 per month, while the other alternative has cash expenses of $5,000 per month and depreciation and amortization expenses of $2,000 per month. Under high capacity, the variable costs per unit are $10; and they are $40 for the other alternative. If the firm bases its decisions on the accounting operating profit break-even, then what are the depreciation expenses under the high-capacity alternative?
A) $3,000
B) $4,000
C) $9,000
D) $5,000

Question

Quizplus · Accepted Answer

To find the depreciation expenses under the high-capacity alternative, we need to use the accounting operating profit break-even formula:

Revenue - Variable Costs - Fixed Costs - Depreciation and Amortization Expense = Operating Profit

Let's start by finding the revenue at the break-even point:

Break-even Sales = Fixed Costs / (Price - Variable Costs)

For the high-capacity alternative:
Break-even Sales = $10,000 / ($50 - $10) = 250 units

For the other alternative:
Break-even Sales = ($5,000 + $2,000) / ($50 - $40) = 700 units

Since the firm is indifferent between purchasing the high-capacity or lower capacity machine as long as sales are 200 units per month, we can immediately eliminate the other alternative from consideration.

Now, we can calculate the accounting operating profit at the break-even point for the high-capacity alternative:

Revenue = 250 units x $50 = $12,500
Variable Costs = 250 units x $10 = $2,500
Fixed Costs = $10,000
Depreciation and Amortization Expense = ?

$12,500 - $2,500 - $10,000 - Depreciation and Amortization Expense = $0
Depreciation and Amortization Expense = $500 - $12,500
Depreciation and Amortization Expense = $3,000

Therefore, the answer is A) $3,000, and the best choice is to purchase the high-capacity machine.

Sechssonic Has Found That It Is Indifferent Between Purchasing a High-Capacity