Question

. The Congress Company has identified two methods for producing playing cards. One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards. The other method would use a less expensive machine (fixed cost = $5,000), but it would require greater variable costs ($1.50 per deck of cards). If the selling price per deck of cards will be the same under each method, at what level of output will the two methods produce the same net operating income?a.5,000 decks

Answer 1

Let’s take “N” as the number of outputs that will produce the same net operating income

Hence, the sales are same under each two methods, therefore, Total Fixed Cost under method 1 + Total Variable Costs under Method 1 = Total Fixed Cost under method 2 + Total Variable Costs under Method 2

$10,000 + [N x $1.00] = $5,000 + [N x $1.50]

$10,000 + $1N = $5,000 + $1.50N

$10,000 - $5,000 = $1.50N - $1N

$5,000 = $0.50N

N = $5,000 / $0.50

N = 10,000 Decks

“Hence, at 10,000 level of outputs, the two methods would produce the same net operating income”