1. Danny Inez wants to start a business producing custom-made bicycles but hasn't started yet.He is uncertain about how many bicycleshe can sell?somewhere between 200 and 600 per year--and has three options for the size of his operations and type of equipment he can buy.He can spend either $300,000 to set up a small operation, $700,000 for a medium size operation or $1.0 million for a larger operation with more equipment. In all three cases, the land for the operation would cost an additional $200,000.He is hoping for at least a 10% return on his investment based on other opportunities that he has.He figures he will spend $30,000/year on additional overhead, regardless of the size of his operation.

His estimated variable costs (per year) at various output levels are given below.

a. If Danny is convinced that his sales volume will be 400 bicycles, which option should he choose and why?

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