Question

Elk Manufacturing has budgeted the following amounts for its next fiscal year:

Total fixed expenses $440,000

Selling price per unit $50

Variable expenses per unit $20

To maintain the original breakeven sales in units if fixed expenses were to increase by 20%, the selling price per unit would have to be:

A. increased by 12%

B. increased by 32%

C. decreased by 32%

D. decreased by 12%

please show step by step so I can understand how to do it

Answer 1

Computation of Break Even sales

Selling price per unit = $50

Less: Variable expenses per unit = $20

Contribution Margin per unit = $30

Break even sales in units = Fixed cost / Contribution Margin per unit

Break even sales in units = $440,000 / $30

Break even sales in units = $14,666.67 units

Fixed cost increased by 20%

So revised fixed cost = $440,000 * 120% = $528,000

Break even sales in units = 14,666.67

14,666.67 = $528,000 / Contribution Margin per unit

Contribution Margin per unit = $36 per unit

Add: Variable cost per unit = $20

Selling price per unit (revised) = $56 per unit

So, increase in selling Price = ($56 - $50) *100 / $50 = 0.12 or 12%

Increase in Selling Price = 12%

Option 'A' is correct