A financial analyst is studying two packaging systems, basic and Deluxe, the bas

Question

A financial analyst is studying two packaging systems, basic and Deluxe, the basic system has variable operating costs of $ 6 per unit and annual costs of $ 600,000 in contrast the Delux system has variable costs of $ 3 and committed cost of $ 800,000 the company sells the products for $ 40 per unit subject to a 10 percent sales commission , Ignor tax

please answer A B and C

A which of the two system will be more profitable for the firm if sales are expected to average 120,000 units per year

B how many units must the company sell to break even if it selects the Delux system

C at what volum level will management be indifferent to the basicsystem and the Delux system

Explanation / Answer

Cont Margin pu for Basic = 40-(6+10%*40) = 30

Cont Margin pu for Delux = 40-(3+10%*40)=33

A. For 120,000 units,

Net inc for Basic = 30*120000-600000 = $3,000,000

Net inc for Delux = 33*120000-800000 = $3,160,000

So Delux is more profitable

B. BEP for Delux = FC/CM pu = 800000/33 = 24,242 units

C. BEP for Basic = 600000/30 = 20000 units

At Indiff Level of Unit P, Net income wil be equal

So P*30 - 600000 = P*33 - 800000

ie 3P = 200,000

ie P = 66,667 units

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