Reference no: EM132967299

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:

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

Problem 2. Which of the two models would be more profitable if sales and production of The Gismo were 184 000 units per year?

Problem 3. 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 a profit of $3 825 600 if Model 2 is selected?

Problem 4. Ignoring the information presented in requirement 3, at what volume will Brighton's management be indifferent as 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?