A financial analyst is studying two packaging systems, basic and deluxe. The basic system has variable operating costs of $6 per unit and annual committed costs of $600,000; in contrast, the deluxe system has variable costs of $3 and committed costs of $800,000. The company sells its products for $40 per unit, subject to a 10 percent sales commission. Ignore taxes.

Required

a. Which of the two systems will be more profitable for the firm if sales are expected to average 120,000 units per year?

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

At what volume level will management be indifferent to the basic system and the deluxe system?

BUILD YOUR OWN SPREADSHEET. Build an Excel spreadsheet to solve requirements

(a) and

(b). How do changes in unit variable costs affect the indifference volume?