Reference no: EM133174083

Question - David Electronics Ltd produces a single product called The Gismo. To produce this product, David 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 David.

Data relevant to the two components are as follows:

Model 1: variable costs, $15.00 per unit, annual fixed costs, $4,940,400.

Model 2: variable costs, $12.80 per unit; annual fixed costs, $4,560,400.

David's selling price for The Gismo is $70 per unit, which is subject to a 10 per cent sales commission. (Ignore income taxes.)

Required -

(a) How many units of The Gismo must David 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 190,000 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 $2,000,000 and will be depreciated over a four-year life by the straight-line method. How many units must the company sell to earn a profit of $4,000,600 if Model 2 is selected?

(d) Ignoring the information presented in requirement 3, at what volume will David'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?