Joy corporation manufactures and sells a single product; cordless
telephones. joy is considering upgrading its current manufacturing
facilities with more modern equipment. Relevant cost data under the
current facility and the upgraded facility is provided below:

                                      current      Upgraded
Manufacturing costs:               
   Direct materials cost per unit      $20.00        $20.00
   Direct labor cost per unit          $18.00        $10.00
   Variable overhead cost per unit     $34.00        $24.00
   Fixed overhead cost in total        $43,000       $160,000
Selling and administrative expenses:
   Variable expense per unit           $5.00         $5.00
   Fixed expense in total              $12,000       $12,000

Under either system, Joy will sell the cordless phones for $125 per phone.

Questions:
1. What is the break-even point (in number of phones) of each option?
2. At what level of sales (in number of phones) will it start being
more profitable for Joy to have the upgraded facilities?

Question #1

The break-even point for the current system is 1145.83 phones or 1146
phones, since you can't sell partial phones.

Solution: Divide the fixed costs by the profit per phone:
Per phone cost = $77 
Profit per phone = $48
Fixed costs = $55,000
Break even point = 1145.83 or 1146 phones


The break-even point for the upgraded system is 2606.06 phones or
2607, since you can't sell partial phones.

Solution: Divide the fixed cost by the profit per phone:
Per phone cost = $59
Profit per phone = $66
Fixed costs = 172,000
Break even point = 2606.06 or 2607


Question #2

After selling 6500 phones the two systems will be at the same profit
level of $257,000.  The upgrades system will begin to be MORE
profitable when they sell 6501 phones.

Solution: Divide the difference in fixed costs by the difference in profit.
Difference is fixed costs = $117,000
Difference in profit per phone = $18
Number of phones for the two systems to be equil = 6500

Please let me know if you require any additional information or
explaination by posting a request for clarification.

Thanks!

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Clarification of Answer by gregaw-ga on 14 Aug 2006 07:46 PDT

You're Welcome!  Thanks for the tip.

Thank you so much!