A parts manufacturer plans to replace its existing facility with a new one. The management is considering two possible capacities for the new facility: 200,000 or 250,000 units per year. The 200,000-unit plant would have an annual fixed cost of $4.0 million and a per unit production cost of $20. The 250,000-unit plant would have an annual fixed cost of $6 million and a per unit cost of $ 15. The parts will be sold for an average price of $60 per unit.
a. Calculate the break-even point for each capacity alternative.
b. Suppose that the company projects its sales to be 220,000 units per year. Which alternative would you recommend? Hint: Calculate the annual profit in each case.