Question

Thompson Company is considering the development of two products: no. 65 or no. 66. Manufacturing cost information follows. No. 65 No. 66

Annual fixed costs $222,000 $340,000

Variable cost per unit 30 25

Regardless of which product is introduced, the anticipated selling price will be $50 and the company will pay a 10% sales commission on gross dollar sales. Thompson will not carry an inventory of these items.

1) Difference between breakeven volume (stated as revenue deollars) for the two products = $

2) Difference between profits of the two products at a sales level of 25,000 units = $

3) At what volume level (expressed as number of units), both products will generate the same level of profit? The volume level =

4) Margin of safety (expressed as a %) for product # 65 when the company is selling 16,000 units =

Answer 1

1) Difference between breakeven volume (stated as revenue deollars) for the two products is calculated as under:

2) Difference between profits of the two products at a sales level of 25,000 units is calculated as under:

3) Let the volume level at which both products wil generate the same level of profit be x. The resultant net profit will be calculated as follows:

From the above table,

15x - 22,000 = 20x - 340,000

or 5x = 118,000

or x = 23,600

Thus at a volume level of 23,600 units, both Product 65 and Product 66 will generate the same level of profit which is calculated as follows:

4) When company is selling 16,000 units of Product 65:

Actual Sales Revenue = 16,000 x 50 = $800,000

Break Even Sales (as calculated in 1) above = $555,000

Margin of safety = Actual Sales - Break Even Sales

= 800,000 - 555,000

= $245,000

Margin of safety(%) = Margin of safety / Actual Sales x100

= 245,000 / 800,000 x 100

= 31% (approx.)