EpicSept is about to introduce a new employee monitoring tool and has determined that it will charge $100 per unit. The firm must decide whether or not to purchase a high-capacity manufacturing machine. If the high-capacity machine is selected, then the cash fixed costs will be $5,000 per year, with variable costs of $50 per unit and depreciation and amortization expenses of $2,000. Otherwise the fixed costs will be $2,000, with variable costs of $75 per unit and depreciation and amortization expenses of $500. If EBIT Break-even is how the firm evaluates its projects, then above what level of expected sales should EpicSept choose the high fixed cost alternative?
A) 60 units
B) 90 units
C) 120 units
D) 180 units

Question

Quizplus · Accepted Answer

To find the EBIT Break-even, we need to set the total cost equal to the total revenue.

Let x be the expected sales in units.

For the high-capacity machine:
Total Cost = $5,000 + $50x + $2,000 = $50x + $7,000
Total Revenue = $100x

For the low-capacity machine:
Total Cost = $2,000 + $75x + $500 = $75x + $2,500
Total Revenue = $100x

Setting the total cost equal to total revenue for both alternatives, we get:
$50x + $7,000 = $100x
$75x + $2,500 = $100x

Solving for x in both equations, we get:
x = 70 units for the high-capacity machine
x = 50 units for the low-capacity machine

Therefore, if EpicSept expects to sell more than 70 units, it should choose the high-capacity machine. So, the answer is D.

EpicSept Is About to Introduce a New Employee Monitoring Tool