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 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 (EBIT)?
A)5,000 decks
B)10,000 decks
C)15,000 decks
D)20,000 decks
E)25,000 decks

Question

Quizplus · Accepted Answer

Let x be the number of decks produced.
The total cost for the first method is:
TC1 = $10,000 + $1x
The total cost for the second method is:
TC2 = $5,000 + $1.50x
Let P be the selling price per deck of cards. The revenue for both methods is:
R = Px
The net operating income (EBIT) is:
EBIT = R - TC
For the first method:
EBIT1 = Px - (10,000 + 1x) = (P - 1)x - 10,000
For the second method:
EBIT2 = Px - (5,000 + 1.5x) = (P - 1.5)x - 5,000
To find the level of output where the two methods produce the same net operating income, we need to set EBIT1 = EBIT2 and solve for x:
(P - 1)x - 10,000 = (P - 1.5)x - 5,000
0.5x = 5,000
x = 10,000
Therefore, the two methods will produce the same net operating income at the production level of 10,000 decks.

Congress Company Has Identified Two Methods for Producing Playing Cards