X Company is considering a modification to one of its main products that would make it more attractive to customers. A market research study costing $5,800 was conducted, and it indicated that the company could increase the price of the product by $2.08 with no decrease in unit sales; the current price is $9.04. Variable costs for the product are $3.50 and will not change as a result of the modification, but additional equipment would have to be rented, increasing fixed costs from $11,910 to $15,990. At what unit sales level would X Company be indifferent between modifying the product and not modifying it?
The indifference point in accounting in the point where there is no financial difference between two alternatives. To calculate the indifference point, the behavior of fixed and variable cost must be taken into account.
Answer and Explanation: 1
- Note that the cost of the market research is irrelevant. It had been incurred and would have no effect on the two alternatives.
The indifference point is the sales point where the currrent situation and the new delevelopment would yield the same results, so it is where:
($9.04 - $3.50)x - $11,910 = ($2.08 + $9.04 - $3.50)x - $15,990
$5.54x - $11,910 = $7.62x - $15,990 $7,62x - $5.54x = $15,990 - $11,910 $2.08x = $4,080
x = 1,962 units
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fromChapter 8 / Lesson 1
In accounting, there are relevant and irrelevant costs. Relevant costs include differential, avoidable, and opportunity costs. Irrelevant costs include sunk and fixed overhead costs. In this lesson, we will learn about these and calculate them.