Question

Required information [The following information applies to the questions displayed below.]

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, $19.00 per unit

Annual fixed costs, $986,100

Model no. 4399:

Variable costs, $10.80 per unit

Annual fixed costs, $1,114,200

Corrigan’s selling price is $66 per unit for the universal gismo, which is subject to a 5 percent sales commission. (In the following requirements, ignore income taxes.)

2-a. Calculate the net income of the two systems if sales and production are expected to average 43,000 units per year.

2-b. Which of the two systems would be more profitable? Model No. 6754 Model No. 4399

Answer 1

a.

Net income is calculated by making difference between total sales revenue and total cost. Total revenue is the product of units and selling price per unit. Total cost is the aggregate of variable cost and fixed cost.

Sales commission per unit = $66 × 5% = $3.3

M: 54:

Total variable cost per unit = 19 + 3.3 = $22.3

M: 99:

Total variable cost per unit = 10.80 + 3.3 = $14.1

Statement of net income

	M: 54	M: 99
Sales revenue	($66 × 43,000 =) $2,838,000	($66 × 43,000 =) $2,838,000
Less: Variable cost	($22.3 × 43,000 =) $958,900	($14.1 × 43,000 =) $606,300
Contribution	$1,879,100	$2,231,700
Less: Fixed cost	$986,100	$1,114,200
Net income	$893,000	$1,117,500

b.

M: 99 is more profitable, since its net income is higher than the net income of M: 54.