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# Calculating BEP and DOL in the given case

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(c) From the DOL formula, you can see that a manufacturing plant with higher fixed costs and lower variable costs will have a higher DOL relative to a plant with higher variable costs and lower fixed costs i.e. a capital intensive production process will have a higher DOL than a labor intensive process which means that a capital intensive production process will increase profits at a faster rate (relative to quantity) than a labor intensive process. Suppose a company is currently producing 1000 units of a bottled power drink priced at \$5. It is using a manufacturing process with a fixed cost of \$1450 and variable cost of \$2.75 per unit (i.e. AVC).
i. Calculate the DOL and the break even point for this produc- tion process. Is the company breaking even yet?

BE= Fixed Costs
-------------------
Price- Variable Cost Per Unit

\$1450
------
\$5- 2.75 = 644.44

ii. If the company installs updated machinery its fixed costs rise to \$2000 and AVC drops to \$2.25. Calculate the DOL and break even point.

iii. At what production level should the company switch from the old machinery to the upgraded one?
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