Question

Selling price per unit (package of 2 CDs)......................................	$27.00
Variable costs per unit:
Direct material...............................................................................................................	$5.50
Direct labor......................................................................................................................	$6.00
Artist's royalties..............................................................................................................	$5.00
Manufacturing overhead..........................................................................................	$3.50
Selling expenses............................................................................................................	$2.50
Total variable costs per unit............................................................	$22.50
Annual fixed costs:
Manufacturing overhead..........................................................................................	$192,000
Selling and administrative.......................................................................................	$276,000
Total fixed costs................................................................................	$468,000
Forecasted annual sales volume (120,000 units).........................	$3,240,000

Management estimates that direct-labor costs will increase by 8% next year.

How many units will the company have to sell next year to reach its break-even point

Answer 1

To reach at break even point, company needs to calculate its break even point (in units) for next year:

B.E.P. (in units) = Total fixed cots / contribution margin

Contribution margin = Selling price per unit - variable cost per unit

As, direct labour cost will increase by 8% next year , so new labour cost will be $6.00+8% = $6.48

Therefore, variable cost per unit for the next year = $22.5 + $0.48

= $22.98

Contribution per unit will be for next year = $27.00 - $ 22.98 = $ 4.02

As, fixed cost will remain same as there is no change is given here.

Therfore, B.E.P. (in units) = $ 468,000 / $ 4.02

= 116,417.91 units or

= 116,418 units (approx)

Therefore, company has to sell 116,418 units to reach its break even point.