Break-even analysis. Bright Light Auto Lamps has found that it is indifferent between purchasing a high-capacity vacuum sealing machine or a lower capacity machine as long as sales are above 200 units per month. The price of each sealed beam light is $50. The high-capacity machine has cash expenses of $10,000 per month, while the alternative has cash expenses of $5,000 per month and depreciation and amortisation expenses of $2,000 per month. Under high capacity, the variable costs per unit are $10; and they are $40 for the other alternative. If the company bases its decisions on the Accounting Operating Profit Break-even, then what are the depreciation expenses under the high-capacity alternative?
A) $3,000
B) $4,000
C) $9,000
D) none of the above

Question

Quizplus · Accepted Answer

The depreciation expenses under the high-capacity alternative are $3,000. This is because the cash expenses for the high-capacity machine are $10,000 per month, and the variable costs per unit are $10. Therefore, the total expenses per month for the high-capacity machine are $10,000 + ($10 * 200) = $20,000. The total expenses per month for the lower capacity machine are $5,000 + ($40 * 200) + $2,000 = $21,000. Therefore, the difference in total expenses between the two machines is $21,000 - $20,000 = $1,000. This difference is due to the depreciation and amortisation expenses of the lower capacity machine. Therefore, the depreciation and amortisation expenses of the high-capacity machine must be $3,000.

Break-Even Analysis