The management of a firm wants to introduce a new product. The product will sell for $3 a unit and can be produced by either of two scales of operation. In the first, total costs are

TC = $4,000 + $2.8Q.

In the second scale of operation, total costs are

TC = $12,560 + $2.4Q.

1. What is the break-even level of output for each scale of operation? Round your answers to the nearest whole number.

The first scale of operation: units

The second scale of operation: units

2. What will be the firms profits for each scale of operation if sales reach 21,400 units? Round your answers to the nearest dollar.

The first scale of operation: $

The second scale of operation: $

3. One-half of the fixed costs are noncash (depreciation). All other expenses are for cash. If sales are 19,600 units, will cash receipts cover cash expenses for each scale of operation? Enter your answers as positive values. Round your answers to the nearest dollar.

The first scale of operation generates a (positive or negative) cash flow of $______.

The second scale of operation generates a (positive or negative) cash flow of $______.

4. The anticipated levels of sales are the following:
5. If management selects the scale of production with higher fixed cost, what can it expect in years 1 and 2? Round your answers to the nearest dollar.
6. Earnings in year 1: $
7. Earnings in year 2: $
8. If the firm selects the scale with higher fixed costs, its earnings in year 1 will be (lower than, or higher than, or equal to earnings in year 2.
9. If sales reach only 21,400 a year, was the correct scale of operation chosen? Be sure to consider all the factors.
10. (The first scale of operation, or The second scale of operation) should have been preferred.

Year	Unit Sales
1	20,400
2	21,400
3	22,400
4	23,400