With the possibility of the US Congress relaxing restrictions on cutting old growth, 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 measure of lumber. The tax rate for the company is 30%. The company has the following two opportunities:
‘ Build factory A with an annual fixed cost of $20 million and variable costs of $0.10/board foot. This factory has an annual capacity of 500 million board feet.
‘ Build factory B with annual fixed costs of $10 million and variable costs of $0.12/board foot. This factory has annual capacity of 300 million board feet.