Reference no: EM132286822

Learning outcome:

Apply capital budgeting practices and evaluate investment decisions

Calculate, apply and evaluate different types of costs to various costing systems

Apply management tools to assist in the planning and control of business operations

Use management accounting information to assist decision-making in a given business situation

ASSIGNMENT INSTRUCTIONS

Question 1:

MEC Electronic Ltd produces a single product called Bravo, a new model DVD player. To produce Bravo, MEC purchases a key component from Macy Ltd. Macy Ltd has two versions of this component and both are suitable for Bravo. However, the costs for both models, Model 1 and model 2 are different, the fixed cost producing the Bravo DVD player also varies, because of using the different model versions of the components.

Model 1: Variable costs $8 per unit; annual fixed costs $1,971,200; Model 2: Variable costs $6.4 per unit; annual fixed costs $2,227,200.
MEC Ltd sets the selling price for Bravo as $32 per unit, which is subjected to a 5 percent sales commission.

1) How many units of Bravo must MEC sell to break even if Model 1 is selected?

2) Which of the two models would be more profitable if sales and production of Bravo were 184,000 units per year?

3) Assume model two requires the purchase of additional equipment that is not mentioned in the above question. The equipment cost $900,000 and will be depreciated over a five-year life by the straight-line method ($180,000 per year). How many units must MEC sell to earn a profit $1,912,800 if Model 2 is selected?

4) Ignore the information presented in requirement 3, at what volume will MEC's management be indifferent to whether Model 1 or Model 2 is purchased - that is, at what level of production will the annual total cost of each alternative be equal?

Question 2:

Sonny Ltd manufactures LCD screen for desktop computer. The following data relates to the period just ended, when the company produced and sold 42,000 LCD screens:

Sales               $4,032,000
Variable costs   $1,008,000
Fixed costs       $2,736,000

The management of the company is considering relocating its production from Vietnam to China to reduce costs. If this happens, variable costs are expected to average $21.60 per set and fixed costs are anticipated to be $2,380,800.

5) Calculate the company's current profit and determine the level of sales (in dollars) needed to double that figure, assuming that manufacturing operations remain in Vietnam.

6) Determine the break-even point if operations are shifted to China.

7) Assume Sonny Ltd desires to achieve the break even point calculated for China in requirement 2. However, it has now decided to keep its operations in Vietnam.

a. If unit variable costs remain constant, what level of fixed costs is needed to achieve the desired break even point?

b. If fixed costs remain constant, what level of unit variable costs is needed to achieve the desired break even point?