Point of Indifference - The William Company manufactures personal sized drip coffee makers. The coffee makers sell for $25. At present, the coffee makers are manufactured in a small plant that relies on direct labor workers. Therefore, variable costs are high, totaling $15 per machine.

Last year, the firm sold 30,000 coffee makes with the following results.

Williams Company Income Statement

Sales $750,000

Less Variable Costs 450,000

Contribution Margin 300,000

Less Fixed Costs 210,000

Operating Income $ 90,000

The firm is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable costs per coffee maker by 40% (that is, variable costs will decrease by 40% per unit). However, fixed costs in the new plant will double.

Calculate the POI for the current manufacturing process and for the new automated plant.(Hint:First calculate the per unit P and V from the information above.)

If unit sales next year are expected to be about the same as this year (about 30,000 units), should the firm go ahead with construction of the new plant?

If unit sales next year are expected to increase to 40,000 units due to expanded marketing of the unit, should the firm go ahead with construction of the new plant?