Brighton Electronics Ltd produces a single product called The Gismo. To produce this product, Bright 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 1 and Model attract different costs for Brighton.
Data relevant to the two components are as follows
• Model 7: variable costs, $8.00 per unit, annual fixed costs, $1 971 200.
• Model 2: variable costs, $6.40 per unit, annual fixed costs $2 227 200.
Brighton’s selling price for The Gismo is $32 per unit, which is subject to a 5 percent sales commission (Ignore income taxes.)
1. How many units of The Gismo must Brighton sell to break even if Model 1 is selected?
2. Which of the two models would be more profitable if sales and production of The Gismo were 184 000 units per year?
3. Assume Model 2 requires the purchase of additional equipment that is not reflected in the above data. The equipment will cost $900 000 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 $1 912 800 if Model 2 is selected?
4. Ignoring the information presented in requirement 3, at what volume will Brighton’s management by 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?