With the possibility of the US Congress relaxing restrictions on cutting old growth timber, a local lumber company is considering an expansion of its facilities. The company believes it can sell lumb

With the possibility of the US Congress relaxing restrictions on cutting old growth timber, a local lumber company is considering an expansion of its facilities. The company believes it can sell lumber for $0.18/board foot. A board foot is a unit of measure for lumber. The tax rate for the company is 30 percent. The company has the following two opportunities:

• Build Factory A with annual fixed costs of $20 million and variable costs of $0.10/board foot.

• Build Factory B with annual fixed costs of $10 million and variable costs of $0.12/board foot.

Required:

a. What is the break-even point in board feet for Factory A and Factory B?

b. If the company wants to generate an after-tax profit of $2 million with Factory B, how many board feet would the company have to process and sell?

c. If demand for lumber is uncertain, which factory is riskier? Why?

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