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A cloth manufacturing firm is deciding whether or not to invest in new machinery.The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000.The firm's current fixed costs are $9,000 and current marginal cost are $15.The firm currently charges $18 per unit.
-The current break-even quantity is
A)3000
B)600
C)500
D)300

Question

​Use the following setup for question
A cloth manufacturing firm is deciding whether or not to invest in new machinery.The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000.The firm's current fixed costs are $9,000 and current marginal cost are $15.The firm currently charges $18 per unit.
-​The current break-even quantity is
A)​3000
B)600
C)500
D)​300

Quizplus · Accepted Answer

To calculate the break-even quantity, we need to determine the total cost and total revenue at the current production level. 
The total cost is the sum of the fixed cost and the variable cost. At the current production level, the variable cost is 15 per unit multiplied by the current quantity. So, the total cost is 9,000 + 15Q.
The total revenue is the product of the current price per unit and the current quantity. So, the total revenue is 18Q. 
To find the break-even quantity, we need to solve for Q:
9,000 + 15Q = 18Q
9,000 = 3Q
Q = 3,000
Therefore, the current break-even quantity is 3,000. 
Since the new machinery is expected to increase cash flows in the first and second year, it is likely that the investment will be profitable. Therefore, the best choice would be to invest in the new machinery.

​Use the Following Setup for Question

Use the Following Setup for Question