Question

Health Equipment Sdn Bhd is considering the development of two products: no. 65 or no. 66. Manufacturing cost information follows.
                                         No 65.               No 66

Annual fixed cost          220,000.        340,000.

Variable cost per unit          33                  25

Regardless of which product is introduced, the anticipated selling price will be $50 and the company will pay a 10% sales commission on gross dollar sales. Paranormal will not carry an inventory of these items.
Required:
A. What is the break-even sales volume (in dollars) on product no. 66?

B. Which of the two products will be more profitable at a sales level of 25,000 units?

C. At what unit-volume level will the profit/loss on product no. 65 equal the profit/loss on product no. 66?

Answer 1

A. Contribution Margin for Product 66 = $50 - 25 - 5 = $20 per unit

Break even sales volume = Fixed Cost / Contribution Margin per unit
= $340000 / 20 = 17000 units

B.

	No 65	No 66
Sales Revenue	$      1,250,000	$       1,250,000
Variable Costs
Variable Product Cost	$         825,000	$          625,000
Sales Commission	$         125,000	$          125,000
Contribution Margin	$         300,000	$          500,000
Fixed Costs	$         220,000	$          340,000
Net Operating Income	$           80,000	$          160,000

Product No 66 is more profitable

C.
Unit volume = Change in Fixed Costs / Change in Variable costs
= 120000 / 8 = 15000 units