A company is deciding which of two new thermostat systems to produce and sell. The Basic system has variable costs of $8.00 per unit, excluding sales commissions, and annual fixed costs of $520,000; the Deluxe system has variable costs of $6.40, excluding sales commissions, and fixed costs of $672,000. The company’s selling price is $32 per unit for the Basic model and $38 for the Deluxe model. The company pays a 10 percent sales commission.

a. Which of the two systems will be more profitable for the firm if sales for either system are expected to average 150,000 units per year?

b. How many units must the company sell to break even if it selects the Deluxe system?

c. Suppose the Basic system requires the purchase of additional equipment that is not reflected in the preceding figures. The equipment will cost $224,000 and will be depreciated over a 10-year life by the straight-line method. How many units must the company sell to earn $40,000 of income, after considering depreciation, if the Basic system is selected?

d. Now, ignore the information presented in part c. Write a report that explains to management the level of volume at which it should be indifferent between the Basic system and the Deluxe system.