Question 1: Breakeven analysis (40 Marks)

Comtech Inc. manufactures Cell phones. Last year Comtech sold 20,000 phones at $100 each. Total costs amounted to $1,800,000 of which $800,000 were considered fixed.

In an attempt to improve its product, the company is considering replacing a component part that has a cost of $16 with a new and better part costing $26 per unit in the coming year. A new machine would also be needed to increase plant capacity. The machine would cost $120,000 with a useful life of five years and a $20,000 salvage value. The company uses straight-line depreciation on all plant assets. (Ignore company tax.)

Required:

1. Calculate in units, Innovation's break-even point for last year. (10 marks)
2. Calculate the number of units that the company would have had to sell in the last year to earn $ 200,000. Prove your answer. (10 marks)
3. If Comtech increases the selling price by $20, and purchases the new part and the new machine, calculate the new contribution margin, the new fixed cost & the number of units that the company will have to sell to make the same net income as last year. (20 marks)