Cost Volume Profit Analysis
With the possibility that the US Congress will relax restrictions on cutting old growth, a local lumber company is considering expanding its facilities. They can sell the lumber for .18 a board foot. The tax rate for the company is 30%. The company has the following two opportunities:
1. Build factory A with annual fixed costs of $20 million and variable costs of $.10 /board-foot for factory A?
2. Build factory B with annual fixed costs of $10 million and variable costs of .12 /board foot. This factory has an annual capacity of 300 million board feet.
a. What is the break-even point in board-feet for factory A?
b. If the company wants to generate an after tax profit of $2 million with factory B, how many board feet would it have to process and sell?
c. If demand for lumber is uncertain which factory is riskier?
d. AT what level of board-feet would the after tax profit of the two factories be the same?
Solution contains calculations of BEP and sales required to earn desired profit and level sales at which the after tax profit of the two factories be the same