Reference no: EM133088083

Question - Cost volume profit analysis - CVP relationships; indifference point: manufacturer Brighton Electronics Ltd produces a single product called The Gismo. To produce this product, Brighton purchases a key component from Supplier A. Supplier A has two versions of this component and both are suitable for insertion into The Gismo. However, the two alternative components, Model 1 and Model 2, attract different costs for Brighton.

Data relevant to the two components are as follows:

Model 1: variable costs, $16.00 per unit; annual fixed costs $3,942,400

Model 2: variable costs, $12.80 per unit; annual fixed costs, $4,454,400

Brighton's selling price for The Gismo is $64 per unit, which is subject to a 5 per cent sales commission. (Ignore income taxes.)

Required -

a) How many units of The Gismo must Brighton sell to break even if Model 1 is selected?

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

c) Assume Model 2 requires the purchase of additional equipment that is not reflected in the above data. The equipment will cost $1,800,000 and will be depreciated over a five-year life by the straight-line method. How many units must the company sell to earn à profit of $3,825,600 if Model 2 is selected?

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