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Question
Carolina Vineyards is considering two alternative production methods for turning grapes into wine. One method calls for using a hand-operated press, while the other would employ a new, automated press. It has been estimated that the variable cost per bottle will amount to $2.00 using the old press and $0.50 using the new machine. If the new machine is purchased, fixed operating costs will equal $150,000, and interest charges will be $80,000. Fixed operating costs of $25,000 will be incurred if the company decides to use the old press, and interest costs will be zero because no debt will be needed. Assume that sales (in units) will be 100,000 bottles under the automated method and 75,000 units under the labor intensive method. What sales price per unit would cause Carolina to be indifferent between the two methods?
a. $2.00
b. $2.20
c. $4.00
d. $4.20
e. $6.00
Answer
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