Question - Korosa and Delancey, Ltd. 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 A:
Variable costs, $8.00 per unit
Annual fixed costs, $1,971,200
Model B:
Variable costs, $6.40 per unit
Annual fixed costs, $2,227,200
Korosa and Delancey's selling price is $32 per unit for the universal gismo, which is subject to a 5 percent sales commission. (ignore income tax)
Required:
1) How many units must the company sell to beak even if Model A is selected?
2) Which of the two systems would be more profitable if sales and production are expected to average 184,000 units per year?
3) Assume Model B requires the purchase of additional equipment that is not reflected in the preceding figures. The equipment will cost $900,000 and will be depreciated over a five-year life by the straight-line method. How many units must the company sell to earn $1,912,800 of income if Model B is selected?
4) Ignoring the information presented in requirement (3), at what volume level will management be indifferent between the acquisition of Model A and Model B? In other words, at what volume level will the annual total cost of each system be equal?