Sally Sturgeon owns a company that manufactures and sells fishing rods. Sally’s latest creation is the Bass-O-Matic, a graphite fishing rod designed with a trigger-stick Portuguese cork handle and Sally’s revolutionary titanium guide system. Compared to other fishing rods on the market, Sally believes her Bass-O-Matic not only will reduce hand and arm fatigue but also will allow anglers to make longer and more precise casts with smoother retrieves.

Sally can make the Bass-O-Matic with one of two available technologies. The first technology is a labor-intensive technology; if Sally chooses this technology, then she will incur fixed costs of $500,000 per year and a variable cost of $50 per fishing rod. The second technology is a capital-intensive technology; if Sally chooses this technology, then she will incur fixed costs of $2,500,000 per year and a variable cost of $25 per fishing rod. Both technologies lead to identical product quality and an identical selling price of $75 per fishing rod.

Required:

a. What is Sally’s breakeven point in units with the labor-intensive technology? What is Sally’s breakeven point in units with the capital-intensive technology?

b. Which technology is preferred if sales are expected to be 40,000 units? Which technology is preferred if sales are expected to be 90,000 units? At what sales level would the two technologies yield identical profit?

c. On the same graph, draw a profit line for each of the two technologies. Using your graph, intuitively explain your answer to part (b) above.

d. Suppose Sally believes that there is a 50% chance that sales will equal 40,000 units and a 50% chance that sales will equal 90,000 units. What is Sally’s expected profit with the labor-intensive technology? What is Sally’s expected profit with the machine intensive technology?

e. What is the range of profit (using 40,000 and 90,000 as the lowest and highest possible demand estimates) under each technology? Which technology has the greater range in profit? Explain your answer using the profit graph you constructed earlier. What inference do you draw about the variability of profit under the two technologies?