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Dillon, Jones, and Kline, Ltd. is studying the acquisition of two electrical component insertion...

Question:

Dillon, Jones, and Kline, Ltd. is studying the acquisition of two electrical component insertion systems for producing its sole product, the universal gismo. Data relevant to the systems follow.

Model A:

Variable costs, $8.00 per unit

Annual fixed costs, $1,971,200

Model B:

Variable costs, $6.40 per unit

Annual fixed costs, $2,227,200

The selling price is $32 per unit for the universal gismo, which is subject to a 5 percent sales commission. (Ignore income taxes.)

Assume Model B requires the purchase of additional equipment that is not reflected in the preceding figures. The equipment will cost $900,000 and will be depreciated over a five-year life by the straight-line method.

How many units must the company sell to earn $1,912,800 of income if Model B is selected? Sales and production are expected to average 184,000 units per year.

Sales in Units Required to Achieve Certain Amount of Operating Income

Cost-volume-profit (CVP) analysis is a cost accounting technique and analysis used to build relationships between costs, sales volumes, and profitability. CVP analysis is also used to drive decisions about what types of products to manufacture and/or to sell, what price(s) to sell them for, and to start what volume of sales is required to break-even and cover fixed costs. In order to use and apply CVP analysis, expenses must be classified into variable and fixed costs.

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How many units must the company sell to earn $1,912,800 of income if Model B is selected? Sales and production are expected to average 184,000 units...

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Break-Even Analysis: Definition & Example

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Chapter 4 / Lesson 3
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A break-even analysis utilizes a price calculation formula to determine how much product a business must sell and at what price in order to make a profit. Learn how to apply this analysis through examples with fixed and variable costs, and discover the importance of a margin of safety.


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