solution

The management of a firm wants to introduce a new product. The product will sell for $5 a unit and can be produced by either of two scales of operation. In the first, total costs are

TC = $2,500 + $2.7Q.

In the second scale of operation, total costs are

TC = $4,460 + $2.3Q.

1. What is the break-even level of output for each scale of operation? Round your answers to the nearest whole number.

   The first scale of operation: units

   The second scale of operation: units

2. What will be the firm’s profits for each scale of operation if sales reach 4,900 units? Round your answers to the nearest dollar.

   The first scale of operation: $

   The second scale of operation: $

3. One-half of the fixed costs are non cash (depreciation). All other expenses are for cash. If sales are 900 units, will cash receipts cover cash expenses for each scale of operation? Enter your answers as positive values. Round your answers to the nearest dollar.

   The first scale of operation generates a -Select-positive negative Item 5 cash flow of $ .

   The second scale of operation generates a -Select-positive negative Item 7 cash flow of $ .

4. The anticipated levels of sales are the following:

   Year	Unit Sales
   1	3,900
   2	4,900
   3	5,900
   4	6,900

   If management selects the scale of production with higher fixed cost, what can it expect in years 1 and 2? Round your answers to the nearest dollar.

   Earnings in year 1: $

   Earnings in year 2: $

   If the firm selects the scale with higher fixed costs, its earnings in year 1 will be -Select-lower than higher than equal to Item 11 earnings in year 2.

   If sales reach only 4,900 a year, was the correct scale of operation chosen? Be sure to consider all the factors.

   -Select-The first scale of operation The second scale of operation Item 12 should have been preferred.