Reference no: EM132853324

Question - DEC produces the same power generators in two plants, a newly renovated plant in ABC and an older, less automated plan in XYZ. The following data are available for the two plants:

Description	ABC	XYZ
Selling price	$150.00	$150.00
Variable manufacturing cost per unit	$72.00	$88.00
Fixed manufacturing cost per unit	$30.00	$15.00
Variable marketing cost per unit	$14.00	$14.00
Fixed marketing costs per unit	$19.00	$14.50
Operating income per unit	$15.00	$18.50
Production rate per day	400 units	350 units
Normal annual capacity usage	250 days	250 days
Maximum annual capacity	320 days	320 days

All unit fixed costs are calculated on a normal year of 250 working days. When the number of working days exceeds 250, variable manufacturing costs increase by $3.00 per unit in ABC and $8.00 per unit in XYZ.

DEC is expected to produce and sell 224,000 generators during the coming year. Wanting to maximize the higher profit of XYZ, DEC's production manager has decided to manufacture 112,000 units of each plant. This plan results in XYZ operating at capacity (350 units per day 320 days) and ABC operating its normal volume (400 units per day over the relevant number of days). The company's tax rate is 40%.

REQUIRED -  

1. If DEC wishes to make net income of $120,000 operating within normal capacity in each division, how many units must be produced?

2. Calculate the operating income that would result from the division production manager's plan to produce 112,000 units at each plant.

3. Assuming contribution margins per unit are within normal capacity levels in each plant, at what level of volume will the company be indifferent about where to locate its production facility?