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?
Homework Answers
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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