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, $16.00 per unit
	Annual fixed costs, $986,300

Model no. 4399:
	Variable costs, $10.80 per unit
	Annual fixed costs, $1,114,400

Corrigan’s selling price is $64 per unit for the universal gismo, which is subject to a 5 percent sales commission. (In the following requirements, ignore income taxes.)

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-a. Calculate the net income of the two systems if sales and production are expected to average 41,000 units per year.


2-b. Which of the two systems would be more profitable?

multiple choice

• Model No. 6754

• Model No. 4399

3. Assume Model 4399 requires the purchase of additional equipment that is not reflected in the preceding figures. The equipment will cost $450,000 and will be depreciated over a five-year life by the straight-line method. How many units must Corrigan sell to earn $974,000 of income if Model 4399 is selected? As in requirement 2, sales and production are expected to average 41,000 units per year. (Do not round intermediate calculations and round your final answer up to nearest whole number.)

4. Ignoring the information presented in part 3, 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

1. Break Even(Model 6754) =Fixed Cost/Contribution per unit

Fixed Cost=986300

Contribution per unit=Sales-Variable Cost per unit

=64-16

=48

Break Even(Units)=986300/48=20547.92 or 20548 Units

2-a. Net Income

Particulars Model-6754 Model-4399

Sales(64*41000) 2624000 2624000

Less:Variable cost (656000)[16*41000](442800)[10.8*41000]

Contribution 1968000 2181200

Less:Fixed Cost (986300) (1114400)

Net Income 981700 1066800

2-b Model-4399 is more profitable as income is more which is 85100(1066800-981700) as compared to Model-6754.

3. Units required=Fixed Cost+Profit/Contribution Per unit

Fixed Cost=1114400+450000=1564400

Profit=974000

Contribution Per unit=64-10.8=53.2

Units Required=1564400+974000/53.2

=2538400/53.2

=47714.29 or 47714 Units

4. Volume level total cost will be equal

=Change in fixed cost/Change in variable cost per unit

=1114400-986300/16-10.8

=128100/5.2

=24634.62 or 24635 Units.

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