Your company plans to produce a new product, a wireless computer mouse. Two machines can be used to make the mouse, Machines A and B. The price per mouse will be $25.00 regardless of which machine is used. The fixed and variable costs associated with the two machines are shown below. At the expected sales level of 75,000 units, how much higher or lower will the firm's expected EBIT be if it uses Machine B with high fixed costs rather than Machine A with low fixed costs, i.e., what is EBITB - EBITA?
A) $123,019
B) $136,688
C) $151,875
D) $168,750
E) $185,625

Question

Quizplus · Accepted Answer

Machine B has higher fixed costs but lower variable costs. Calculate EBIT for both machines and find the difference: EBITB - EBITA = (Revenue - Fixed CostsB - Variable CostsB) - (Revenue - Fixed CostsA - Variable CostsA). The difference is $168,750.

Your Company Plans to Produce a New Product, a Wireless