Answer (A) is correct . Company 1’s unit contribution margin is $1.20 ($3 – $.62 – $.13 – $.75 – $.30) and Company 2’s is $.60 ($3 – $.65 – $.15 – $1.25 – $.35). The BEP in units is found by dividing the fixed costs by the UCM. Thus, Company 1’s is 800,000 ($960,000 ÷ $1.20) and Company 2’s is 420,000 ($252,000 ÷ $ .60). The volume at which profits are equal occurs when the difference between total revenue and total cost is also the same. Company?1 has a per unit cost of $1.80 ($.62 + .13 + .75 + .30) and Company 2 has a per unit cost of $2.40 ($.65 +.15 + 1.25 + .35). Both charge $3 per deck, so total revenue for the two companies at the indifference volume (U) will be equal. Consequently, total costs should also be equal. U($.62 + .13 + .75 + .30) + $960,000 = U($.65 + .15 + 1.25 + .35) + $252,000
Answer (B) is incorrect because The volume at which Company 1 and Company 2 have equal profits is 1,180,000 units.
Answer (C) is incorrect because The breakeven point is determined by dividing fixed costs by unit contribution margin, not unit variable costs. Furthermore, the volume at which there are equal profits between the companies is also higher.
Answer (D) is incorrect because The breakeven point is determined by dividing fixed costs by unit contribution margin, not unit variable costs.
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