Break-even analysis. Binders-For-School, Inc., is in the process of determining whether to purchase a high-capacity machine to make textbooks for the upcoming school year. The high-capacity machine will generate fixed costs of $10,000 per year versus the $2,000 fixed costs of using a low-capacity machine. The variable costs per unit when using the high-capacity machine will be $30. The firm will charge $60 for each textbook and has determined that the high-capacity machine will maximize pretax operating cash flow if sales are greater than 800 books. What is the contribution margin under the low-capacity machine scenario?

Question

Quizplus · Accepted Answer

To find the contribution margin under the low-capacity machine scenario, we need to determine the variable costs per unit. The problem only provides the variable cost per unit for the high-capacity machine, which is $30 per textbook. However, since the total fixed costs are lower for the low-capacity machine, we can assume that the variable costs per unit for the low-capacity machine are also lower.

We know that the high-capacity machine will maximize pretax operating cash flow if sales are greater than 800 books. Therefore, we can assume that the low-capacity machine has a maximum production capacity of 800 books. If we assume that the variable costs per unit for the low-capacity machine are half of the variable costs per unit for the high-capacity machine ($15 per textbook), then we can calculate the contribution margin as follows:

Contribution margin = Selling price per unit - Variable cost per unit
Contribution margin = $60 - $15
Contribution margin = $45

Therefore, the best choice is to use the low-capacity machine because it has a higher contribution margin of $45 compared to the contribution margin of $30 for the high-capacity machine. This choice will result in lower fixed costs and a higher contribution margin, resulting in a higher profit margin.

Break-Even Analysis