Break-Even Volume Analysis 1 answer below »

Break-Even Volume Analysis

Sandstone Corporation has one of its manufacturing plants operating on a singleshift five-day week. The plant is operating at its full capacity (24,000 units of output per week) without the use of overtime or extra shifts. Fixed costs for single-shift operation amount to $90,000 per week. The average variable cost is a constant $30 per unit, at all output rates, up to 24,000 units per week. The company has received an order to produce an extra 4,000 units per week beyond the current single-shift maximum capacity. Two options are being considered to fill the new order:

• Option 1. Increase the plant’s output to 36,000 units a week by adding overtime, by adding Saturday operations, or both. No increase in fixed costs is entailed, but the variable cost is $36 per unit for any output in excess of 24,000 units per week, up to a 36,000-unit capacity.

• Option 2. Operate a second shift.

The maximum capacity of the second shift is 21,000 units per week. The variable cost of the second shift is $31.50 per unit, and the operation of a second shift entails additional fixed costs of $13,500 per week. Determine the range of operating volume that will make Option 2 profitable.

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