Afirm is deciding between two different sewing machines. technology a has fixed costs of $500 and marginal costs of $50 whereas technology b has fixed costs of $250 and marginal costs of $100. if the price is $60 per unit, what is the break even amount of units for technology b?

The answer is: There is no break even amount of units for technology B

Explanation:

Break-even is the point at which a business generates just enough revenue to cover both fixed and variable costs of production. At this point, the business makes no profit. Each additional unit produced beyond the break-even point generates profit for the business. Fixed costs are costs which do not vary with increased production whereas variable costs are contingent upon the production volume.

In order to calculate the break-even quantity, fixed costs are divided by the contribution margin (selling price per unit less variable cost per unit). This provides the number of units a business needs to produce so as to stop making losses for each unit produced.

The contribution margin for technology A is $10 [$60 - $50] and the break-even quantity is 50 units ($500/$10). After 50 units, the business will start earning a profit.

The contribution margin for technology B is -($40) [$60 - $100]. Since the contribution margin is negative, technology B would incur losses for every unit produced resulting in no contribution to fixed costs. This technology should not be adopted by the firm. Instead the firm should choose technology A as it has a positive contribution to fixed costs.

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