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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, $18.00 per unit
	Annual fixed costs, $986,300

Model no. 4399:
	Variable costs, $11.80 per unit
	Annual fixed costs, $1,114,500

Corrigan’s selling price is $68 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. 2-a. Calculate the net income of the two systems if sales and production are expected to average 43,000 units per year.

3. 2-b. Which of the two systems would be more profitable?

4. Assume Model 4399 requires the purchase of additional equipment that is not reflected in the preceding figures. The equipment will cost $430,000 and will be depreciated over a five-year life by the straight-line method. How many units must Corrigan sell to earn $958,000 of income if Model 4399 is selected? As in requirement (2), sales and production are expected to average 43,000 units per year. (Do not round intermediate calculations and round your final answer up to nearest whole number.)

5. 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

PART 1

FOR BREAK EVEN = FIXED COST / CONTRIBUTION PER UNIT

$986300 / 39.8 PER UNIT

=247820UNITS OF MODEL NO. 6754 IS REQUIRED FOR BREAK EVEN

WORKING NOTE

CALCULATION OF CONTRIBUTION PER UNIT

SALES PRICE =$68 PER UNIT

LESS : COMMISION ON SALES (68 X 15%) =$10.2 PER UNIT

LESS: VARIABLE COST =$18 PER UNIT

CONTRIBUTION PER UNIT =$39.8

PART 2 CALCULATION OF NET INCOME OF MODEL 6754

PARTICULARS AMOUNT

SALES PRICE $68

LESS COMMISION ($68 X 15%) ($10.2)

LESS: VARIABLE COST ($18 )

CONTRIBUTION PER UNIT $39.8

NO. OF UNITS 43000 UNITS

TOTAL CONTRIBUTION $17,11,400

LESS :FIXED COST $986300

NET PROFIT $725100   

PART 2 CALCULATION OF NET INCOME OF MODEL 4399

PARTICULARS AMOUNT

SALES PRICE $68

LESS COMMISION ($68 X 15%) ($10.2)

LESS: VARIABLE COST ($11.8 )

CONTRIBUTION PER UNIT $46

NO. OF UNITS 43000 UNITS

TOTAL CONTRIBUTION $1978000

LESS :FIXED COST $1114500

NET PROFIT $863500

MODEL4399 IS MORE PROFITABLE THEN MODEL 6754

PART 2B

PARTICULARS AMOUNT

DESIRED PROFIT $958000

ADD: DEPRECIATION $86000

ADD: FIXED COST $114500

TOTAL CONTRIBUTION REQUIRED (A) $1158500

CONTRIBUTION PER UNIT (B) $46

NO. OF UNITS TO BE SOLD (A / B) 25185UNITS

WORKING NOTE

DEPRECIATION = COST OF ASSETS / LIFE OF ASSETS

=430000/5

=$86000