West Bend, a firm making toasters, is evaluating a modernization of its old plant located in Kewaskum, Wisconsin. It now sells its toasters for $20 each; variable cost per unit is $8, and fixed costs are $840,000 annually. Based on this data, calculate the following:
a) Calculate the break-even quantity.
b) If the proposed modernization is carried out, the new fixed costs will rise to $1,200,000 annually, but variable costs will fall to $5 per unit. What will be the new break-even point?
c) If the new plant is built, West Bend wants to reduce the price to $19. At what quantities would profits of the old and new plants be equal (assuming the price is $20 for the old plant and $19 with the new plant)?
d) If sales are projected to reach 150,000 units in the near future, would you recommend construction of a new plant? Why or why not? Explain.