Question

Corrigan Enterprises is studying the acquisition of two electrical component insertion systems for producing its sole product, the universal gismo. Data relevant to the systems follow.

Model no. 6754:
	Variable costs, $18.00 per unit
	Annual fixed costs, $986,400

Model no. 4399:
	Variable costs, $11.80 per unit
	Annual fixed costs, $1,114,000

Corrigan’s selling price is $65 per unit for the universal gismo, which is subject to a 15 percent sales commission. (In the following requirements, ignore income taxes.)

Required:

1. How many units must the company sell to break even if Model 6754 is selected? (Do not round intermediate calculations and round your final answer up to nearest whole number.)

2. Calculate the net income of the two systems if sales and production are expected to average 49,000 units per year.

3. Which of the two systems would be more profitable? Model No. 675 or   Model No. 4399

4. Assume Model 4399 requires the purchase of additional equipment that is not reflected in the preceding figures. The equipment will cost $410,000 and will be depreciated over a five-year life by the straight-line method. How many units must Corrigan sell to earn $959,000 of income if Model 4399 is selected? As in requirement (2), sales and production are expected to average 49,000 units per year. (Do not round intermediate calculations and round your final answer up to nearest whole number.)

5. Ignoring the information presented in part (4), at what volume level will the annual total cost of each system be equal? (Do not round intermediate calculations and round your final answer up to nearest whole number.)

Answer 1

Solution 1:
Contribution margin per unit for model 6754 = $65 - $18 - ($65*15%) = $37.25 per unit

Fixed costs = $986,400

Break even point in units = Fixed costs / contribution margin per unit = $986,400 / $37.25 = 26481 units

Solution 2:

Computation of Net Income
Particulars	Model 6754	Model 4399
Sales revenue	$3,185,000.00	$3,185,000.00
Variable Costs:
Variable manufacturing cost	$882,000.00	$578,200.00
Sales commissions	$477,750.00	$477,750.00
Contribution margin	$1,825,250.00	$2,129,050.00
Fixed costs	$986,400.00	$1,114,000.00
Net Income	$838,850.00	$1,015,050.00

Solution 3:

Model no 4399 is more profitable

Solution 4:

Contribution margin per unit for model 4399 = $65 - $11.80 - $65*15% = $43.45 per unit

fixed costs = $1,114,000 + ($410,000/5) = $1,196,000

Nos of units to be sold to earn target income = (Fixed cost + Target Profit) / contribution margin per unit

= ($1,196,000 + $959,000) / $43.45

= 49597 units

Solution 5:

Let total cost of each system will be equal to level of X

$18 X + $986,400 = $11.80 X + $1,114,000

$6.20 X = $127,600

X = 20581 units