Question

Selling price per unit (package of 2 CDs)...................................... \$27.00 Variable costs per unit: Direct material............................................................................................................... \$5.50...

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
Selling expenses............................................................................................................ \$2.50
Total variable costs per unit............................................................ \$22.50
Annual fixed costs:
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

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.