Question

Dillon, Jones, and Kline, Ltd. 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 A:

Variable costs, $20.00 per unit

Annual fixed costs, $985,700

Model B:

Variable costs, $12.80 per unit

Annual fixed costs, $1,114,100

The selling price is $67 per unit for the universal gismo, which is subject to a 15 percent sales commission. (In the following requirements, ignore income taxes.)

1. How many units must the company sell to break even if Model A is selected? (Do not round intermediate calculations and round 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 49,000 units per year. Net IncomeModel A Model B 3. Assume Model B 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 the company sell to earn $956,000 of income if Model B 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 final answer up to nearest whole number.)

Answer 1

1) Break Even Point :

Break Even Point is the point where there is no profit or loss. It is the point where total costs (expenses) and total sales (revenue) are equal.For calculating the Break even units we will use the formula as:

Break Even Point =

Calculation of Unit Contribution Margin:

Particulars	Amount ($)	Amount($)
Selling Price		67
Less:
Variable Cost	20
Sales Commission (67*15%)	10.05	30.05
Unit Contribution Margin		36.95

Using above formula, the Break Even Point in units of Model A

Fixed Cost = $ 985700, as given (Fixed Costs are those costs which do not change depending upon the number of units sold)

Unit Contribution Margin = $ 36.95

Units = 26676.59 OR 26677 Units (Round off)

2) Calculation of Net Income on the basis of 49000 units per year

Particulars	Model A	Model B
(A) Sales (49000 units * $ 67)	$ 3283000	$ 3283000
Less: Variable Cost:
Sales Commission ($ 3283000 * 15%)	$ 492450	$ 492450
System variable costs
49000 units * $ 20	$ 980000
49000 units * $ 12.80		$ 627200
(B) Total Variable Costs	$ 1472450	$ 1119650
Contribution Margin (A-B)	$ 1810550	$ 2163350
Less: Annual Fixed Costs	$ 985700	$ 1114100
Net Income	$ 824850	$ 1049250

3) Here, to calculate the number of units the company must sell to earn $ 956000, we will not consider the depreciation because to calculate the break even units we never include non cash expenses or items.

The Fixed cost of Model B, given = $ 1114100

Net Income to be taken as = $ 956000

Hence, Contribution Margin = $ 2070100

therefore, Contribution per unit (if 49000 units assume) = $ 42.25  

Hence, Number of Units = = = 26369 units