Author Question: Multi-product CVP and decision making. Crystal Clear Products produces two types of water ... (Read 51 times)

vHAUNG6011 · **on:** Jul 6, 2018

Multi-product CVP and decision making.

Crystal Clear Products produces two types of water filters. One attaches to the faucet and cleans all water that passes through the faucet. The other is a pitcher-cum-filter that only purifies water meant for drinking.
The unit that attaches to the faucet is sold for 100 and has variable costs of 35.
The pitcher-cum-filter sells for 120 and has variable costs of 30.
Crystal Clear sells two faucet models for every three pitchers sold. Fixed costs equal 1,200,000.

Required:
1. What is the breakeven point in unit sales and dollars for each type of filter at the current sales mix?
2. Crystal Clear is considering buying new production equipment. The new equipment will increase fixed cost by 208,000 per year and will decrease the variable cost of the faucet and the pitcher units by 5 and 10, respectively. Assuming the same sales mix, how many of each type of filter does Crystal Clear need to sell to break even?
3. Assuming the same sales mix, at what total sales level would Crystal Clear be indifferent between using the old equipment and buying the new production equipment? If total sales are expected to be 24,000 units, should Crystal Clear buy the new production equipment?

Question 2

Both sides of the fundamental accounting equation must always be equal.
Indicate whether the statement is true or false

LP · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

1. Faucet filter:
Selling price 100
Variable cost per unit 35
Contribution margin per unit 65

Pitcher-cum-filter:
Selling price 120
Variable cost per unit 30
Contribution margin per unit 90

Each bundle contains two faucet models and three pitcher models.

So contribution margin of a bundle = 2 65 + 3 90 = 400

Breakeven point in units of faucet models and pitcher models is:
Faucet models: 3,000 bundles 2 units per bundle = 6,000 units
Pitcher models: 3,000 bundles 3 units per bundle = 9,000 units
Total number of units to breakeven 15,000 units

Breakeven point in dollars for faucet models and pitcher models is:
Faucet models: 6,000 units 100 per unit = 600,000
Pitcher models: 9,000 units 120 per unit = 1,080,000
Breakeven revenues 1,680,000

Breakeven point in dollars
Faucet filter: 6,000 units 100 per unit = 600,000
Pitcher-cum-filter: 9,000 units 120 per unit = 1,080,000

2. Faucet filter:
Selling price 100
Variable cost per unit 30
Contribution margin per unit 70
Pitcher-cum-filter:
Selling price 120
Variable cost per unit 20
Contribution margin per unit 100

Each bundle contains two faucet models and three pitcher models.

So contribution margin of a bundle = 2 70 + 3 100 = 440

Breakeven point in units of faucet models and pitcher models is:
Faucet models: 3,200 bundles 2 units per bundle = 6,400 units
Pitcher models: 3,200 bundles 3 units per bundle = 9,600 units
Total number of units to breakeven 16,000 units

Breakeven point in dollars for faucet models and pitcher models is:
Faucet models: 6,400 bundles 100 per unit = 640,000
Pitcher models: 9,600 bundles 120 per unit = 1,152,000
Breakeven revenues 1,792,000

Breakeven point in dollars:
Faucet filter: 6,400 units 100 per unit = 640,000
Pitcher-cum-filter: 9,600 units 120 per unit = 1,152,000

3. Let be the number of bundles for Crystal Clear Products to be indifferent between the old and new production equipment.

Operating income using old equipment = 400 1,200,000

Operating income using new equipment = 440 1,200,000 208,000

At point of indifference:
400 1,200,000 = 440 1,408,000
440 400 = 1,408,000 1,200,000
40 = 208,000
= 208,000 40 = 5,200 bundles

Faucet models = 5,200 bundles 2 units per bundle = 10,400 units
Pitcher models = 5,200 bundles 3 units per bundle = 15,600 units
Total number of units 26,000 units

Let x be the number of bundles,

so Crystal Clear Products is better off with the old equipment.

so Crystal Clear Products is better off buying the new equipment.

At total sales of 24,000 units (4,800 bundles), Crystal Clear Products should keep the old production equipment.

Check
400 4,800 1,200,000 = 720,000 is greater than 440 4,800 1,408,000 = 704,000.

Answer to Question 2

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