Patterson Products Inc. is considering an upgrade to its manufacturing equipment. The two upgrade options under consideration are shown below.
| Option 1 | Option 2 | |||
| Direct material cost per unit | $ | 93.6 | $ | 62.4 |
| Direct labour cost per unit | $ | 66 | $ | 59 |
| Variable overhead per unit | $ | 27.6 | $ | 55.4 |
| Fixed manufacturing costs | $ | 2,160,000 | $ | 5,592,000 |
The selling price of the company’s product is $312 per unit with variable selling costs of 10% of sales. Fixed selling and administrative costs are $3,460,000 per year.
There would be no change to the selling price, variable selling costs, or fixed selling and administrative costs as the result of the manufacturing equipment upgrade.
Homework Answers
| Answer 1. | |||||
| Annual Number of unit sales | |||||
| Answer 2. | |||||
| Option 1 | |||||
| Answer 3. | |||||
| Break even units sales for option 1 | 60043 | Units | |||
| Break even units sales for option 2 | 87038 | Units | |||
| Detailed Calculations | |||||
| Calculation of Indifference point | |||||
| Option 1 | Option 2 | ||||
| Direct material cost per unit | $ 93.60 | $ 62.40 | |||
| Direct labour cost per unit | $ 66.00 | $ 59.00 | |||
| Variable overhead per unit | $ 27.60 | $ 55.40 | |||
| Total Varaiable Manufacturing Cost | $ 187.20 | $ 176.80 | |||
| Fixed manufacturing costs | $ 2,160,000 | $ 5,592,000 | |||
| Indifference Point | Difference in Fixed Cost | = | $ 3,432,000 | = | 330000 |
| Difference in Variable Cost | $ 10.40 | ||||
| Calculation of Contribution under Both the option | |||||
| Option 1 | Option 2 | ||||
| Sale | $ 312.00 | $ 312.00 | |||
| Less: Variable Manufacturing Cost | $ 187.20 | $ 176.80 | |||
| Less: Variable Selling Cost @ 10% of selling Cost | $ 31.20 | $ 31.20 | |||
| Contribution Per Unit | $ 93.60 | $ 104.00 | |||
| Fixed manufacturing costs | 2160000 | 5592000 | |||
| Fixed selling and administrative costs | 3460000 | 3460000 | |||
| Total Fixed Cost | 5620000 | 9052000 | |||
| Calculation of Break even point in unit sales under both the option | |||||
| Option 1 | |||||
| Break even poin in unit sales | Total Fixed Cost | = | $ 5,620,000 | = | 60043 |
| Contribution per unit | $ 93.60 | ||||
| Option 1 | |||||
| Break even poin in unit sales | Total Fixed Cost | = | $ 9,052,000 | = | 87038 |
| Contribution per unit | $ 104.00 | ||||
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