Cathy Kalai owns a company that manufactures and sells premium fishing rods. Cathy's latest creation is the Bass-O-Matic, a graphite fishing rod designed with a trigger-stick Portuguese cork handle and Cathy's revolutionary titanium guide system. Compared to other fishing rods on the market, Cathy 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.

Cathy can make the Bass-O-Matic with one of two available technologies. The first technology is a labor-intensive technology; if Cathy chooses this technology, then she will incur fixed costs of $750,000 per year and a variable cost of $125 per fishing rod. The second technology is a capital-intensive technology; if Cathy chooses this technology, then she will incur fixed costs of $2,250,000 per year and a variable cost of $100 per fishing rod. Both technologies lead to identical product quality and an identical selling price of $150 per fishing rod.

Required

1.What is Cathy's breakeven point in units with the labor-intensive technology? What is Cathy's breakeven point in units with the capital-intensive technology?

2.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?

3.Suppose Cathy believes that there is a 50% chance that sales will equal 40,000 units and a 50% chance that sales will equal 100,000 units. What is Cathy's expected profit with the labor-intensive technology? What is Cathy's expected profit with the machine-intensive technology? (Hint: Expected profit is the average of the profit for the two demand estimates.)

4.Using the OL1 measure we discussed in class, calculate the operating leverage for both technologies at sales volumes of 35,000 and 120,000 units? When would Cathy be comfortable with opting for the high operating leverage technology? Explain.