Problem

A fabrication company must replace its widget machine and is evaluating the capabilities of two available machines. Machine A would cost the company $75,000 in fixed costs for the first year. Each widget produced using Machine A would have a variable cost of $16. Machine B would have a first-year fixed cost of $62,000, and widgets made on this machine would have a variable cost of $20. Machine A would have the capacity to make 18,000 widgets per year, which is approximately double the capacity for Machine B.

(a) If widgets sell for $28 each, find the break-even point for each machine. Consider first-year costs only.

(b) If the fabrication company estimates a demand of 6,500 units in the next year, which machine should be selected?

(c) At what level of production do the two production machines cost the same?