Corrigan Enterprises is studying the acquisition of two electrical component insertion systems for production its sole product, the universal gismo. Data relevant to the system follow;
Model no. 6754:
Variable costs, $16.00 per unit
Annual fixed costs, $985,600
Model no. 4399:
Variable costs, $12.80 per unit
Annual fixed costs, $1,113,600
Corrigan’s selling price is $64 per unit for the universal gismo, which is subject to a 5 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?
2. Which of the two systems would be more profitable if sales and production are expected to average 46,000 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 956,400 of income in Model 4399 is selected? As in requirement (2) sales and production are expected to average 46,000 units per year.
4. Ignoring the information presented in requirement (3) at what volume level will management be indifferent between the acquisition of Model 6754 and Model 4399? In other words, at what volume level will the annual total cost of each system be equal? (Hint: At any given sales volume, sales commissions will be the same amount regardless of which model is selected.)
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