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vazorg [7]
3 years ago
5

Senate Inc. is considering two alternative methods for producing playing cards. Method 1 involves using a machine with a fixed c

ost (mainly depreciation) of $17,000 and variable costs of $1.00 per deck of cards. Method 2 would use a less expensive machine with a fixed cost of only $5,000, but it would require a variable cost of $1.50 per deck. The sales price per deck would be the same under each method. At what unit output level would the two methods provide the same operating income (EBIT)?
Business
1 answer:
photoshop1234 [79]2 years ago
4 0

Answer:

24,000 units

Explanation:

We know,

According to the contribution margin approach,

Operating Income (EBIT) = Sales - Variable cost - Fixed cost

or, EBIT = (Price x Quantity) - (Quantity x VC per unit) - Fixed cost

As there are two methods,

Method 1, Variable cost = $1.00/unit, Fixed cost = $17,000

Method 2, Variable cost = $1.50/unit, Fixed cost = $5,000

According to the Question, as both methods will yield same EBIT at the same output levels,

Method 1 EBIT = Method 2 EBIT

or,  (Price x Quantity) - (Quantity x $1.00) - 17,000 = (Price x Quantity) - (Quantity x $1.50) - $5,000

or, (Quantity x $1.50) - (Quantity x $1.00) = $(17,000 - 5,000) [Deducted (price x quantity from both the sides]

or, $0.50 x Quantity = $12,000

or, Quantity = $12,000/$0.50

Hence, Quantity = 24,000 units

At 24,000 output level, the EBIT of both methods will be same.

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In its income statement for the year ended December 31, 2022, Sunland Company reported the following condensed data.
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       Sunland Company

   Multi Step Income Statement

For the Year Ended December 31, 2022    

Net sales                                                                          $ 2,200,000

Less: Cost of goods sold                                                 ($ 1,257,000)

Gross margin / Profit                                                            $ 943,000

Less: Operating expenses                                                  ($ 722,000)

Income from operations                                                         $ 221,000

Other revenues and gains:    

Interest revenue                                                                     $ 35,000

Other expenses ans losses:    

Interest expense                                          ($ 72,000)  

Loss on disposal of plant assets                  ($ 18,000)           ($ 90,000)

Income before income taxes                                             $ 166,000

Income taxes expenses                                                         ($ 46,000)

Net income                                                                            $ 120,000

Sunland Company

Comprehensive Income Statement

For the Year Ended December 31, 2022    

Net income                                                                   $ 120,000

Add: Other comprehensive income                            $ 8,400

Comprehensive income                                            $ 128,400

Net income (NI), also called net earnings, is calculated as sales minus cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expenses. It is a useful number for investors to assess how much revenue exceeds the expenses of an organization. This number appears on a company's income statement and is also an indicator of a company's profitability.

Learn more about Net income (NI) here

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