Required: 1. Calculate the indifference point between the two cost structures, that is, the amount of unit sales that produce the same operating income for Company X and Company Z. 2. If sales volume were expected to increase by 25% over the next two years, which cost structure would you prefer?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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The cost structure of two firms competing in the same industry is represented by the following cost formulas: Company X =
$2,096,000+ $47/unit; Company Z = $1,016,000+ $92/unit. The selling price is $140 per unit for both companies.
Required:
1. Calculate the indifference point between the two cost structures, that is, the amount of unit sales that produce the same operating
income for Company X and Company Z.
2. If sales volume were expected to increase by 25% over the next two years, which cost structure would you prefer?
1. Indifference point volume
2. Preferred cost structure
units
Transcribed Image Text:The cost structure of two firms competing in the same industry is represented by the following cost formulas: Company X = $2,096,000+ $47/unit; Company Z = $1,016,000+ $92/unit. The selling price is $140 per unit for both companies. Required: 1. Calculate the indifference point between the two cost structures, that is, the amount of unit sales that produce the same operating income for Company X and Company Z. 2. If sales volume were expected to increase by 25% over the next two years, which cost structure would you prefer? 1. Indifference point volume 2. Preferred cost structure units
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