Question

PROBLEM TWO

Pure Water Products produces two types of water filters. One attaches to the faucet and cleans all water that passes through the faucet. The other is a pitcher filter that only purifies water meant for drinking.

The unit that attaches to the faucet is sold for $80 and has variable costs of $30.

The pitcher filter sells for $110 and has variable costs of $40.

Pure Water sells two faucet models for every three pitchers sold. Fixed costs equal $1,050,000.

3. Assuming the same sales mix, at what total sales level would Pure Water be indifferent between using the old equipment and buying the new production equipment? If total sales were expected to be 30,000 units, should Pure Water buy the new production equipment?

Answer 1

Pure water will be indifferent between using the old equipment and buying the new production equipment on 6774 sales of faucet and 10,011 units of sales of pitcher filler.

If total sales were expected to be 30,000 units, Pure Water should not buy the new production equipment as the contribution exceeds fixed cost