Question

Required information Problem 7-47 Continuation of Preceding Problem; Activity-Based Costing; Advanced Manufacturing Systems; Ethical Issues (LO 7-4, 7-9, 7-10) [The following information applies to the questions displayed below.) Jupiter Game Company manufactures pocket electronic games. Last year Jupiter sold 25,000 games at $25 each. Total costs amounted to $525,000, of which $150,000 were considered fixed. An activity-based costing study has revealed that Jupiter's $150,000 of fixed costs include the following components: Setup (40 setups at $400 per setup) Engineering (500 hours at $25 per hour) Inspection (1,000 inspections at $30 per inspection) General factory overhead Total Fixed selling and administrative costs Total fixed costs $ 16,000 12,500 30,000 61,500 $120,000 30,000 $ 150,000 Management is considering the installation of new, highly automated manufacturing equipment that would significantly alter the production process. In addition, management plans a move toward just-in-time inventory and production management. If the new equipment is installed, setups will be quicker and less expensive. Under the proposed JIT approach, there would be 300 setups per year at $50 per setup. Since a total quality control program would accompany the move toward JIT, only 100 inspections would be anticipated annually, at a cost of $45 each. After the installation of the new production system, 800 hours of engineering would be required at a cost of $28 per hour. General factory overhead would increase to $166,100. However, the automated equipment would allow Jupiter to cut its unit variable cost by 20 percent. Moreover, the more consistent product quality anticipated would allow management to raise the price of electronic games to $26 per unit. (Ignore income taxes.)

1. Compute Jupiter’s new break-even point if the proposed automated equipment is installed.(in units)

2.  Determine how many units Jupiter will have to sell to show a profit of $140,000, assuming the new technology is adopted.

Answer 1

	Present		New equipment
Units sold (A)	25000
Selling price p.u (B)	25		26
Sales (A*B)	625000
Total variable cost (D)	375000
Thus, Variable cost p.u E = (D/A)	15		12
Contribution p.u (B-E)	10		14
Setup costs	16000		15000
Inspection	30000		4500
Engineering	12500		22400
Gen factory overhead	61500		166100
Fixed selling & admin costs	30000		30000
Total fixed costs	150000		238000

1. Break even point = Total fixed cost / Contribution p.u = 238000/14 = 17,000 units

2.

Required profit (A)	140000
Fixed costs (B)	238000
Thus, required contribution (A+B)	378000
Contribution p.u	14
Thus, required units = (378000/14)	27000