Winterstone Ltd produces a single product. Winterstone Ltd purchases a key part for this product from Brighton Ltd, which produces two versions of the part, Model A and Model B. Both models are suitable to use for the product, but they attract different costs for Winterstone Ltd. Data relevant to the two models are as follows:

Model A

Variable cost per unit $8.00 Annual Fixed costs $1,969,500

Other information:

Model B

Variable cost per unit $6.40 Annual Fixed costs $2,230,050

Winterstone Ltd sells the product for $35 per unit.

1. Sales are subject to 5% sales commission.

2. Winterstone Ltd pays income taxes of 30%.

Required: Show all your workings.

1. How many units of the product must Winterstone Ltd sell to break even if Model A is selected?

2. Which of the two models would be more profitable if sales and production of the product were 95 000 units per year? (Ignore income tax)

3. Assume that Model B requires the purchase of additional equipment that is not reflected in the provided data. The equipment will cost $900,000 and will be depreciated over a five- year life by the straight-line method. How many units must the company sell to earn an after-tax profit of $1,338,960 if Model B is selected?