Answer:
William Company
a) Volume level in boxes at which the economy popper and the regular popper would earn the same profit (loss):
Economy Regular Difference in costs
Total Fixed costs $58,000 $131,000 $73,000
Total Variable costs per unit $430 $350 $80
Volume = Difference in fixed costs/Difference in variable = $73,000/$80
= 912.5 boxes
b. Decision rule: We assume a selling price of $1,000 per box, then based on this selling price, we calculate the contribution per box. The decision rule is to purchase the machine that has the least break-even point in sales unit.
Economy Regular Super
Total fixed annual costs $58,000 $131,000 $320,000
Selling price per box $1,000 $1,000 $1,000
Total variable cost per box $430 $350 $260
Contribution per box $570 $650 $740
Break-even point = 101.75 201.54 432.43
The most profitable machine is the Economy Popper since it has the least break-even point. This is the point at which management will start realizing some profits after covering all the fixed costs.
c. Management may not be able to use the average number of boxes sold per seat for the entire chain and the capacity of each theater to develop this decision rule. Using this will be complicated. But, using the break-even point for each machine is a lot easier and simpler to implement.
Explanation:
a) Machine Capacities and Costs Data and Calculations:
Economy Regular Super
Annual capacity (boxes) Cost 50,000 120,000 300,000
Annual machine rental $8,000 $11,000 $20,000
Total fixed annual costs $58,000 $131,000 $320,000
Popcorn cost per box 130 130 130
Other costs per box 220 140 050
Cost of each box 080 080 080
Total variable cost per box $430 $350 $260
