Peggy lane corp., a producer of machine tools, wants to move to a larger site. two alternative locations have been identified: bonham and mckinney. bonham would have fixed costs of $ 800,000 per year and variable costs of $ 13,000 per standard unit produced. mckinney would have annual fixed costs of $ 920,000 and variable costs of $ 12,000 per standard unit. the finished items sell for $ 29,000 each.

a. at what volume of output would the two locations have the same profit?
b. for what range of output would bonham be superior (have higher profit? )
c. for what range would mckinney be superior?
d. what is the relevance of break-even points for these cities?

Instructions are listed below.

Explanation:

Giving the following information:

Two alternative locations have been identified: Bonham and McKinney. Bonham would have fixed costs of $ 800,000 per year and variable costs of $ 13,000 per standard unit produced. McKinney would have annual fixed costs of $ 920,000 and variable costs of $ 12,000 per standard unit. The finished items sell for $ 29,000 each.

Costs:

Bonham= 800,000 + 13,000*x

McKinney= 920,000 + 12,000*x

1) 800,000 + 13,000*x=920,000 + 12,000*x

1,000x=120,00

x=120 units

2) Because Bonham has a higher variable cost, from the indifference point and below, it generates a higher profit. From 120 units and more it generates less profit than McKinney.

3) Break-even point= fixed costs/ contribution margin

Bonham:

Break-even point= 800,000/(29,000 - 12,000)= 47 units

McKinney:

Break-even point= 920,000/(29,000-13,000)= 58 units

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