Question

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

Total fixed expenses	​$435,000
Selling price per unit	​$70
Variable expenses per unit	​$30

To maintain the original breakeven sales in units if fixed expenses were to increase by​ 10%, the selling price per unit would have to be

A.

increased by​ 5.71%

B.

decreased by​ 20.00%

C.

decreased by​ 5.71%

D.

increased by​ 20.00%

Answer 1

The correct answer would be A. Increase by 5.71%

Break even point = Fixed Costs/Contribution Margin per unit.
Contribution per unit = Selling Price - Variable Cost.

Original Break even units = 435000/(70-30) = 435000/40 = 10875 units.

Now, Fixed costs increased by 10% = 435000+10% = 435000+43500 = $478500.
Units remain same at 10875.
So, contribution margin to be earned to maintain same level of breakeven sales = 478500/10875 = $44. (Because breakeven units = Fixed cost/contribution ; So, Contribution = Breakeven units * Fixed Costs [Cross Multiply])
Contribution = Selling Price - Variable Cost(remains same)
44= Selling Price-30.

So new selling price = Contribution + Variable Cost = 44+30 = $74.


Old Selling Price $70
New Selling Price $74
Increase 74-70 = $4
% of increase = 4/70*100 = 5.71%