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, $19.00 per unit
	Annual fixed costs, $986,200

Model no. 4399:
	Variable costs, $10.80 per unit
	Annual fixed costs, $1,114,100

Corrigan’s selling price is $66 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 6754 is selected? (Do not round intermediate calculations and round your 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 41,000 units per year.

3. Assume Model 4399 requires the purchase of additional equipment that is not reflected in the preceding figures. The equipment will cost $450,000 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 41,000 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

Question 1

Particulars	Model 6754
Annual Fixed Costs	986,200
÷ Contribution Margin per Unit	37.10
Break Even Point in Units	26,583 Units

Particulars	Amount
Sales Price per Unit	66
Less : Variable Costs per Unit	(19)
Less: Sales Commission per Unit	(9.90)
Contribution Margin per Unit	37.10

Sales Commission = 15% of $ 66 = $ 9.90

Question 2A

Particulars	Model 6755	Model 4399
Contribution Margin per Unit	37.10	45.30
* Units Sold	41,000	41,000
Contribution Margin	1,521,100	1,857,300
Less: Fixed Costs	(986,200)	(1,114,100)
Net Operating Income / (Loss)	534,900	743,200

Particulars	Model 4399
Sales Price per Unit	66
Less : Variable Costs per Unit	(10.80)
Less: Sales Commission per Unit	(9.90)
Contribution Margin per Unit	45.30

Sales Commission = 15% of $ 66 = $ 9.90

Question 3

Fixed Costs = 11,14,100 + 90,000 (Depreciation on Additional Equipment)

Fixed Costs = $ 12,04,100

Depreciation = Cost of Asset - Salvage Value / Useful Life in Years

= 450,000 - 0 / 5

= $ 90,000 Per Year

Units to be Sold of Model 4399 to earn Target Profit = (Target Profit + Fixed Costs) / Contribution Margin per Unit of Model 4399

Target Profit = $ 970,000

Fixed Costs = $ 12,04,100

Units to be sold = (970,000 + 12,04,100) / 45.30

Units to be sold = 47,993

Question 4

Indifferent Point is the place where cost are equal for various alternatives being available

Total Cost for Model 6754 = Total Cost for Model 4399

Let Number of Units for Variable Cost = X

Variable Costs per Unit * Number of Units + Fixed Costs for Model 6754 = Variable Costs per Unit * Number of Units + Fixed Costs of Model 4399

19X + 9.9X + 986,200 = 10.80X + 9.9X + 11,14,100

28.9X + 986,200 = 20.70 X + 11,14,100

28.9X - 20.70X = 11,14,100 - 986,200

8.2 X = 127,900

X = 127900 / 8.20

X =15,598 Units

At the Level of 15,598 Units Total Cost for both the Model will be same.