Question

Dillon, Jones, and Kline, 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

The selling price is $ 32 per unit for the universal gismo, which is subject to a 5 percent sales commission. (In the following requirements, ignore income taxes.)

Required:
1. How many units must the company sell to break even if Model A is selected?
2. Which of the two systems would be more profitable if sales and production are expected to aver-age 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? As in requirement (2), sales and production are expected to average 184,000 units per year.
4. Ignoring the information presented in requirement (3), at what volume level will management be indifferent between the acquisition of Model A and Model B? In other words, at what volume level will the annual total cost of each system be equal?



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  • CreatedApril 22, 2014
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