Question

Pharoah Industries sells two electrical components with the following characteristics. Fixed costs for the company are $202,000 per year. XL-709 CD-918 Sales price V$30.00 $45.00 Variable cost 26.00 37.00 Sales volume 40,400 units 60,600 units 80, 800 How many units of each product must Pharoah Industries sell in order to break even? (Round answers to o decimal places, e.g. 25,000.) 30X-8 lox-40,4000 4X-40,400 ó XL-709 CD-918 Break even units Pharoah's vice president of sales has determined that due to market changes, the sales price of component XL-709 can be increased to $34.00 with no impact on sales volume. What will be Pharoah's new breakeven point in units? 34x-abx-404106 CD-918 XL-709 Returning to the original information, Pharoah's vice president of marketing believes that spending $60,600 on a new advertising campaign' will increase sales of component CD-918 to 80,800 units, without affecting the sales of product XL-709. How many units of each product must Pharoah sell to New Break even point in units break even under this new scenario? CD-918 XL-709 The market changes referred to in part (b) indicate additional overall demand for component XL- 709. Pharoah's vice president of marketing believes that if the company spends $60,600 to advertise component XL-709 rather than CD-918, as planned in part (c), the company will be able to sell a total of 50,500.units of XL-709 at the new price of $34.00. If the company must choose to advertise only one component, which component should receive the additional $60,600 in advertising? Break even units more in since it expects to earn $ The company should advertise product operating inceme than if it advertised

Answer 1

Solution

1.

Sales mix ratio:

Sales of XL 709: Sales of CD 918

40400: 60600

1 : 1.5

Now by using equation method, where X is the number of XL 709 sold.

At break even point:

Contribution margin of XL 709+ contribution margin of CD 918 - fixed cost=operating income

($30-$26) X+ ($45-$37) 1.5X - $202000=$0

4X+12X=$202000

X=12625 units

units of XL 709=12625 units

Units of CD 918(1.5×12625) =18938 units

2. When selling price of XL 709 is increased to $34 then:

At break even point:

Contribution margin of XL 709+ contribution margin of CD 918 - fixed cost=operating income

($34-$26) X+ ($45-$37) 1.5X - $202000=$0

8X+12X=$202000

X=10100 units

units of XL 709=10100 units

Units of CD 918(1.5×10100) =15150 units

3.

New sales mix :

XL 709 : CD 918

40400: 80800

1: 2

New fixed expenses=$202000+$60600

=$262600

At break even point:

Contribution margin of XL 709+ contribution margin of CD 918 - fixed cost=operating income

($30-$26) X+ ($45-$37) 2X - $262600=$0

4X+16X=$262600

X=13130 units

units of XL 709=13130 units

Units of CD 918(2×13130) =26260 units

4.

Advertising XL 709 then operating income will be:

=($34-$26) 50500 units +(45-37) 60600 units -$262600

=$404000+$484800-$262600

=$626200

Advertising CD 918 then operating income will be:

=($30-$26) 40400 units +(45-37) 80800 units -$262600

=$161600+$646400-$262600

=$545400

Company should advertise product XL 709 since it expects to earn $80800(626200-545400) more operating income than if it advertised CD 918