Question

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Acme Inc manufactures a fax machine with the following costs and revenue budget. New Technology is available so that the variable cots at the budget sales level could be reduced to $42,000. The additional investment could increase total fixed cost to $65,020. In considering this operating leveraging decision, what is the indifference sales level above which this investment should be made and below which this investment should not be made.

revenue 140,000

variable cost 81,200

Fix cost 41,500

a. 60,980 b. 72,244 c. 84,000 d. 54,605 e. none of the above

Answer 1

Answer is 84000 units

Calculated as

Variable Cost per unit before new investment = $81200/140000 = $0.58 Per Unit

Variable cost after new investment = $42000/140000 = $0.30 per unit

Indifference sales point = Difference in Fixed Cost/ Difference in variable cost per unit

= ($65020-$41500)/($0.58-$0.30)

= $23520/0.28

= 84000 Units

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