Question

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: Alpha $200,000 $30 Beta $300,000 Annual fixed costs Variable cost per unit $20 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?

Answer 1

16.

Contribution margin 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

From the above income statement, it can be seen that At sales level of 20,000 units, Beta is more profitable.

17.

Beta is more profitable by $100,000 (300,000 - 200,000)

18.

Let for Y 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

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

10Y = 100,000

Y = 10,000

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

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