NT Electronics manufactures two LCD screen television models: The Croc, which has been produced since 2015 and sells for $900, and the Kanga a newer model introduced since 2019 and sells for $1140. Based on the following income statement for the year ended 30 November 2020, senior management at NT Electronics have decided to concentrate marketing resources on the Kanga model and to begin to phase out the Croc model.

NT Electronics

Income Statement for the year ended 30 November 2020

	Croc $	Kanga $	Total $
Revenues	19,800,000	4,560,000	24,360,000
Cost of Goods Sold	12,540,000	3,192,000	15,732,000
Gross Margin	7,260,000	1,368,000	8,628,000
Selling and Admin Expenses	5,830,000	978,000	6,808,000
Operating Profit	1,430,000	390,000	1,820,000
Units Produced and Sold	22,000	4,000
Net Income per unit sold	65.00	97.50

Unit Cost for Croc and Kanga are as follows:

	Croc ($)	Kanga ($)
Direct Materials	208	584
Direct Labour
Croc (1.5hours x 12)	18
Kanga (3.5hours x 12)		42
Machine Cost
Croc (8hours x 18)	144
Kanga (4hours x 18)		72
Manufacturing Overhead other than Machine cost	200	100
Total Cost	570	798

Manufacturing overhead was allocated to products based on machine hours at the rate of $25 per hour.

NT Electronics financial controller, Susan Benzo, is advocating the use of activity-based costing and activity-based management and has gathered the following information about the companys manufacturing overhead cost for the year ended 30 November 2020.

		Units of the Cost Allocation base
Activity Centre	Total Activity Costs ($)	Croc	Kanga	Total
Soldering (number of points)	942,000	1,185,000	385,000	1,570,000
Shipments (number)	860,000	16,200	3,800	20,000
Quality Control (number)	1,240,000	56,200	21,300	77,500
Purchase Orders (number)	950,4000	80,100	109,980	190,080
Machine Power (machine-hours)	57,600	176,000	16,000	192,000
Machine set-ups (number)	750,000	16,000	14,000	30,000
Total manufacturing overhead	4,800,000

After completing her analysis, Benzo shows the results to Fred Duval, NT Electronics managing director. Duval does not like what he sees. Fred argues that the company engages in many other activities and they have not been included and that activity based costing is too complex, expensive and time consuming. He further argues that activity based costing is irrelevant to a small company with a small range of products like NT Electronics.

Question

Assume that NT Electronics only produces Croc and its variable cost consists of only direct materials, direct labour and machine cost as identified above. The total fixed costs for the year including selling and admin cost for the year was $6,360,000.

Required:

1. Calculate how many units of Croc NT Electronics must produce to ensure that it does not make a loss.
2. If the company intends to make a total profit of $4,000,000 for the year, how many units should NT Electronics produce?

The company is considering purchasing a new machine that would increase fixed costs by $1,600,000 but reduce machine costs by 50%. Based on the current production volume of 22,000 units should the company go ahead with the proposal (i.e., would the companys profit increase.)