Zoran Corporation manufactures and sellsa single product; cordless telephones. Zoran is considering upgrading its current manufacturing facilities with more modern equipment. Relevant cost data under the current facility and the upgraded facility is provided below:
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Current
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Upgraded
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Manufacturing costs:
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|
|
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Direct materials cost per unit
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$20.00
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$20.00
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|
Direct labor cost per unit
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$18.00
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$10.00
|
|
Variable overhead cost per unit
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$34.00
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$24.00
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|
Fixed overhead cost in total
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$43,000
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$160,000
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|
Selling and administrative expenses:
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|
|
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Variable expense per unit
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$5.00
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$5.00
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|
Fixed expense in total
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$12,000
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$12,000
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Under either system, Zoran will sell the cordless phones for $125 per phone.
Required:
a. What is the break-even point (in number of phones) of each option?
b. At what level of sales (in number of phones) will it start being more profitable for Zoran to have the upgraded facilities?