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, $986,300
Model no. 4399:
Variable costs, $11.80 per unit
Annual fixed costs, $1,113,800
Corrigan's selling price is $68 per unit for the universal gismo, which is subject to a 10 percent sales commission. (In the following requirements, ignore income taxes.)
Three parts to this question:
1. How many units must the company sell to break even if Model 6754 is selected?
2-a. Calculate the net income of the two systems if sales and production are expected to average 45,000 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 $962,000 of income if Model 4399 is selected? As in requirement (2), sales and production are expected to average 45,000 units per year.