Question

Keene, Inc. produces flash drives for computers, which it sells for $20 each. Each flash drive costs $6 of variable costs to make. During March, 1,000 drives were sold. Fixed costs for March were $5.60 per unit for a total of $5,600 for the month. If variable costs decrease by 10%, what happens to the break-even level of units per month for Keene?

It is 10% higher than the original break-even point.

It decreases about 16 units.

It decreases about 40 units.

It depends on the number of units the company expects to produce and sell.

Vaughn reported the following results from the sale of 5000 units in May: sales $330000, variable costs $210000, fixed costs $90000, and net income $30000. Assume that Vaughn increases the selling price by 5% on June 1. How many units will have to be sold in June to maintain the same level of net income?

4396.

4643.

4750.

5000.

Answer 1

Solution:

1. It decreases about 16 units

2. 4396

Explanation:

1.

Break even units = Fixed cost / Contribution per unit  

Contribution per unit = selling price per unit - Variable cost per unit = 20-16 = $14

Break even units = 5600 / 14 = 400

if variable cost decreases by 10%

variable cost per unit = 16 x (100-10)% = 6 x 90% = 5.4

contribution per unit = 20-5.4 = 14.6

break even units = 5600/14.6 = 384

the break even units are decreased by 16 (400-384)

  

2. selling price = 330000 / 5000 = 66

Increase selling price = 66+ 5% = 69.3

Variable cost per unit = 210,000 / 5000 = 42

Contribution per unit = 69.3-42 = 27.3

Break even units = (fixed cost + desired profit) / Contribution per unit = (90000+30000) / (69.3-42)

= 120000 / 27.3

= 4396