Question

Patterson Products Inc. is considering an upgrade to its manufacturing equipment. The two upgrade options under consideration are shown below. Option 1 Option 2 Direct material cost per unit $ 72.0 $ 48.0 Direct labour cost per unit $ 54 $ 47 Variable overhead per unit $ 18.0 $ 41.0 Fixed manufacturing costs $ 2,100,000 $ 4,500,000 The selling price of the company’s product is $240 per unit with variable selling costs of 10% of sales. Fixed selling and administrative costs are $3,400,000 per year. There would be no change to the selling price, variable selling costs, or fixed selling and administrative costs as the result of the manufacturing equipment upgrade. Required: 1. At what annual number of unit sales would Patterson Products Inc. be indifferent between the two upgrade options? 2. If demand falls short of the indifference point calculated in part (1), which option would be preferred? Option 1 Option 2 3. Calculate the break-even point in unit sales under each upgrade option. (Round your final answers to the nearest whole number.)

Answer 1

please provide rating..

			Option -1		Option -2
	Sale price per unit		240		240
	Variable cost
	Material		72		48
	Labor		54		47
	Overhead		18		41
	Selling		24		24
	Total fixed cost		168		160
	Contribution		72		80
	Fixed cost
	Manufacturing		2,100,000		4,500,000
	Selling and administrative		3,400,000		3,400,000
	Total fixed cost		5,500,000		7,900,000
Answer 1)	Lets assume that at X unit of sale both option are indifferent . Therefore we will have below equation
	72*X -5500000 = 80*X-7900000
	8*X =	2,400,000
	X=	300000
	at 300000 unit both the option will be indifferent
Answer 2)	If demad is falling option - 1 will be better compared to option -2 as option 2 has higher fixed cost
Answer 3)	Break even in unit sales
			Option -1		Option -2
	Fixed cost		5,500,000		7,900,000
	Contribution per unit		72		80
	Break even unit = Fixed cost / contribution per unit		76,389		98,750