Question

Use the following information for the next 3 questions. Thompson Company is considering the development of two products: Alph

Thompson Company is considering the development of two products: Alpha and Beta. Regardless of which product is introduced, the anticipated selling price will be $50.

Manufacturing cost information follows:

16.Which of the two products will be more profitable at a sales level of 20,000 units?
a. Alpha
b. Beta

17.Refer to the previous question. By what amount is the product (Alpha or Beta) more profitable?

18.At what volume level (i.e., number of units) will the profit for the two products be the same?

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Answer #1

16.

To find profit at sales level of 20,000 units, we need to prepare income statement at sales level of 20,000 units.

Income statement

Alpha Beta
Sales 20,000 x 50 = 1,000,000 20,000 x 50 = 1,000,000
Variable costs 20,000 x 30 = - 600,000 20,000 x 20 = - 400,000
Contribution margin 400,000 600,000
Fixed costs - 200,000 - 300,000
Profit $200,000 $300,000

At sales level of 20,000 units, Beta is more profitable as Beta will generate higher profits as compared to Alpha

17.

At sales level of 20,000 units, profit of Alpha = $200,000

At sales level of 20,000 units, profit of Beta = $300,000

Hence, Beta is more profitable by $100,000

18.

Let for Z number of units, profit is same for Alpha and Beta.

Profit for Alpha = Profit for Beta

Sales - Variable costs - Fixed costs = Sales - Variable costs - Fixed costs

50Z - 30Z - 200,000 = 50Z - 20Z - 300,000

10Z = 100,000

Z = 10,000

Hence, at 10,000 units, profit will be same for both Alpha and Beta.

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