Stockout Company sells a single product with a unit contribution margin of $25/unit. Demand for the product is variable. The expected demand per year is 30K units, and the standard deviation in demand per year is 8K units. Demand is assumed to be normally distributed.

Stockout Companys capacity has remained constant at 14K units per year for each of the last several years. Its total fixed costs at that capacity level are $100K per year.

It is now thinking about increasing its capacity substantially, because it has had to turn away business year after year because of its previous capacity constraints. It is now considering increasing its capacity to a total of 46K units per year. If it does that, its total fixed costs will rise to a total of $350K per year (that is, a $250K increase from its past fixed costs). If it raises its capacity to this new level, this will have no effect on either the selling price of its products or its variable costs per unit produced.