You have the option to add a new product line to your facility, with capacity to produce 1000 widgets per month. Initial analysis shows that the breakeven point is 500 widgets per month. Monthly...

You have the option to add a new product line to your facility, with capacity to produce 1000 widgets per month. Initial analysis shows that the breakeven point is 500 widgets per month. Monthly demand is at a sales price of $30 per widget is 400 widgets per month. Should you add the new line? How much should you produce, if so?

Expert Answers
justaguide eNotes educator| Certified Educator

A new product line can be added to the facility with capacity to produce 1000 widgets per month. Information obtained from an early analysis places the break-even point at 500 widgets per month. The demand is estimated at 400 widgets per month at a sales price of $30.

The question does not provide any details on how demand for the widget changes with sales price, the cost of setting up the new product line and other fixed and variable costs involved in producing the widgets.

Considering only the fact that estimated monthly demand is lower than the that required to break even, the new product line should not be added. To increase demand by 100 widgets per month, the sales price would have to be lowered. This would decrease the total earnings from selling the widgets and as a result will further increase the number required to be produced to break even. As demand for the widget is not likely to go up by a large extent, adding the the new product would not benefit the facility.