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In: Accounting

Problem 3 Krystal Klear Corp. produces two types of water filters. One attaches to the faucet...

Problem 3
Krystal Klear Corp. produces two types of water filters. One attaches to the faucet and the other is a pitcher-cum-filter that only purifies water for drinking. The unit that attaches to the faucet is sold for $ 100 and has variable costs of $ 35. The pitcher-cum-filter sells for $ 120 and variable costs of $ 30. The firm sells two faucet filters for every three pitchers sold. Fixed costs total
$ 1,200,000.
a.   What is the breakeven point in sales $ for each type of filter at the current sales mix?
b.   The firm is considering buying new production equipment. This will cause fixed costs to increase $ 208,000 annually. Variable costs for the faucet and the pitcher units will decrease by $ 5 and $ 10, respectively. Presuming the same sales mix, how many of each type of filter does Krystal Klear need to sell to break even?
c.   Presuming the same sales mix, at what total sales level would the firm be indifferent between using the old equipment and buying the new production equipment? If total sales are expected to be 24,000 units, should Krystal Klear buy the new production equipment? Provide support for your answer (i.e., operating income old vs new).

Expert Solution

Answer 3

We have to assume the number of bundles where the company will be indfferent is "x"

Thus, for new equipment - operating income would be

= $440x - $1408000

Also, for old equipment - operating income would be

= $400x - $1200000

Therefore, the point of difference can be calculated as follow, by equating the both:

$440x - $1408000 = $400x - $1200000

solving for x, we get

x = 5200 bundles - is the point of indifference

Thus, at sales of 26000 units i.e. 5200 bundles, the company would be indifferent between both the machines - can use either of them.

Also, as the question has asked when 24000 units sold which would machine would be choosen - the new machine equipment will be beneficial in such cases as operating income will be higher with it rather than using the old machine.

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ekkarill92 answered 1 year ago

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