Question

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, $16.00 per unit
	Annual fixed costs, $986,000

Model no. 4399:
	Variable costs, $10.80 per unit
	Annual fixed costs, $1,114,300

Corrigan’s selling price is $61 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 47,000 units per year.

2-b. Which of the two systems would be more profitable?

• Model No. 6754

• Model No. 4399

3. Assume Model 4399 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 Corrigan sell to earn $970,000 of income if Model 4399 is selected? As in requirement (2), sales and production are expected to average 47,000 units per year. (Do not round intermediate calculations and round your final answer up to nearest whole number.)

4. Ignoring the information presented in part (3), at what volume level will the annual total cost of each system be equal? (Do not round intermediate calculations and round your final answer up to nearest whole number.)

Answer 1