Break Even Volume Analysis
Sandstone Corporation has one of its manufacturing plants operating on a singleshift five day week. The plant is operating at its full capacity (24,000 units of output per week) without the use of overtime or extra shifts. Fixed costs for single shift operation amount to $90,000 per week. The average variable cost is a constant $30 per unit, at all output rates, up to 24,000 units per week. The company has received an order to produce an extra 4,000 units per week beyond the current single shift maximum capacity. Two options are being considered to fill the new order:
• Option 1. Increase the plant’s output to 36,000 units a week by adding overtime, by adding Saturday operations, or both. No increase in fixed costs is entailed, but the variable cost is $36 per unit for any output in excess of 24,000 units per week, up to a 36,000 unit capacity.
• Option 2. Operate a second shift.
The maximum capacity of the second shift is 21,000 units per week. The variable cost of the second shift is $31.50 per unit, and the operation of a second shift entails additional fixed costs of $13,500 per week. Determine the range of operating volume that will make Option 2 profitable.