Horton and Associates produces two products named the Big Winner and the Loser. Last month 1,000 units of the Loser and 4,000 units of the Big Winner were produced and sold. Average prices and costs for the two products for last month follow:

The production lines for both products are highly automated, so large changes in production cause very little change in total direct labor costs. Workers who are classified as direct labor monitor the production line and are permanent employees who regularly work 40 hours per week.

All costs other than corporate fixed costs listed under each product line could be avoided if the product line were dropped. Corporate fixed costs totaled $125,000, and the total sales amounted to 5,000 units, producing the average cost per unit of $25. About $10,000 of the corporate fixed costs could be avoided if the Loser were dropped, and about $15,000 of the corporate fixed costs could be avoided if the Big Winner were dropped. The remaining $100,000 could be avoided only by going out of business entirely.

REQUIRED

A. What is the overall corporate breakeven in total sales revenue, assuming the sales mix is the same as last month’s?

B. What is the breakeven sales volume (in units produced and sold) for the Loser? (In other words, what is the sales volume at which Horton should be financially indifferent between dropping and retaining the Loser?)

C. List at least two qualitative or risk factors that would affect the decision to keep or drop the Loser.

Transcribed Image Text:

Big Winner Loser $95 40 Selling price Direct materials Direct labor Variable overhead Product line fixed costs Corporate fixed costs $225 95 25 15 40 25 $ 25 10 25 $10 Average margin per unit