Question

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.

REQUIRED:

1. What is the breakeven point in unit sales and dollars for each type of filter at the current sales mix?

2. Pure Water is considering buying new production equipment. The new equipment will increase fixed costs by $180,000 per year and will decrease variable cost of the faucet and pitcher units by $5 and $8, respectively. Assuming the same sales mix, how many of each type of filter does Pure Water need to sell to breakeven?

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?

PROBLEM THREE

Safari USA, Inc. sells three types of stuffed animals, elephants, dogs, and bears. The following information is available:

	Elephants	Dogs	Bears	Total
Sales Volume	40,000	20,000	80,000
Selling Price	$14	$20	$30
Variable cost per unit	8	10	25
Total fixed costs				$400,000

REQUIRED (show all supporting calculations):

1. What is the breakeven point for Safari USA?
2. Would you recommend promoting the change in product mix to 1 to 4 to 2 of elephants, dogs, and bears? Why?
3. An EXECUTIVE SUMMARY IS REQUIRED.

Answer 1

1.(a)

Contribution per unit of faucet = $80 - $30 i.e. $50

Contribution per unit of pitcher filter = $110 - $40 i.e. $70

Contribution per unit in current sales mix = [($50 * 2) + ($70 * 3)] / 5

= ($100 + $210) / 5

= $62 per unit

Fixed cost = $1,050,000

Break even units = $1,050,000 / $62 i.e. 16,935.48 units i.e. 16,935 units

Break even units of faucet = (16,935 * 2) / 5 i.e. 6,774 units

Break even units of pitcher filter = (16,935 * 3) / 5 i.e. 10,161 units

Break even $ sales of Faucet = 6,774 units @ $80 i.e. $541,920

Break even $ sales of pitcher filter = 10,161 units @ $110 i.e. $1,117,710

1.(b)

Contribution per unit of faucet = $80 - $25 i.e. $55

Contribution per unit of pitcher filter = $110 - $32 i.e. $78

Contribution per unit in current sales mix = [($55 * 2) + ($78 * 3)] / 5

= ($110 + $234) / 5

= $68.8 per unit

Fixed cost = $1,050,000 + $180,000 i.e. $1,230,000

Break even units = $1,230,000 / $68.8 i.e. 17,877.91 units i.e. 17,878 units

Break even units of faucet = (17,878 * 2) / 5 i.e. 7,151 units

Break even units of pitcher filter = (17,878 * 3) / 5 i.e. 10,727 units

1. (c)

Profit under old equipment = 62x - $1,050,000

Profit under new equipment = 68.8x - $1,230,000

At indifference point,

62x - $1,050,000 = 68.8x - $1,230,000

68.8x - 62x = $1,230,000 - $1,050,000

6.8x = $180,000

x = 26,470.588 units i.e. 26,471 units

At 30,000 units of sales level, Pure Water should buy the new equipment.

Note: As per HOMEWORKLIB POLICY, we have to answer only one question. I have answered your first question. Please post the second question again. Thanks.