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Determining the best choice

Ski Boards, Inc., wants to enter the market quickly with a new finish on its ski boards. It has three choices: (a) refurbish the old equipment at a cost of $800, (b) make major modifications at the cost of $1,100, or (c) purchase new equipment at a net cost of $1,800. If the firm chooses to refurbish the equipment, materials and labor will be $1.10 per board. If it chooses to make modifications, materials and labor will be $0.70 per board. If it buys new equipment, variable costs are estimated to $.40 per board.

A) Graph the three total cost lines on the same chart.
B) Which alternative should Ski Boards, Inc., choose if it thinks it can sell more than 3,000 boards?
C) Which alternative should the firm use if it thinks the market for boards will be between 1,000 and 2,000?

Solution Preview

Please refer attached file for missing graph.

A) Graph the three total cost lines on the same chart.
Choice A- Refurbish the old equipment
Fixed Cost=F=$800
Variable Cost per unit=V=$1.10
Total Cost=800+1.10*Q, where Q is output level.

Choice B- Make Major Modifications
Fixed Cost=F=$1,100
Variable Cost per unit=V=$0.70
Total Cost=1100+0.70*Q, where Q is output level.

Choice C- Purchase new equipment
Fixed Cost=F=$1,800
Variable Cost per unit=V=$0.40 ...

Solution Summary

Solution describes the steps to determine the best choice at the given level of outputs.

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