Northern Woods is considering two methods of production for a new product. The first method will require fixed assets costing $450,000 that will be depreciated straight-line to zero over the project life, annual fixed costs of $316,000, and variable costs per unit of $8.64. The second method will require fixed assets costing $790,000, annual fixed costs of $211,000, and variable costs per unit of $6.57. The new product will sell for $20 a unit, have a life of 3 years, a discount rate of 16 percent, and a tax rate of 35 percent. Should the produce be produced and if so, which method of production should be implemented? Justify your answer.
yes; Method A; because it has the lower initial cost
yes; Method A; because it will break-even on a financial basis with fewer annual sales
yes; Method B; because it has lower annual costs
yes; Method B; because it has a lower financial break-even quantity
no; neither method of production provides a means of obtaining a financial break-even point within the expected life of the project