Question

Assume a company has fixed costs of $100,000, sells one product at $12 per unit, and has Variable Costs of $10 per unit. Compute the break even point in units and sales dollars.

Now assume that the company spends money on automation equipment that raises its fixed costs by $50,000, but lowers its variable costs per unit to $8 per unit. Re-compute the breakeven point in units and sales dollars.

Answer #1

1) | |||||

Contribution Margin Per Unit = Sales price - variable cost per unit | |||||

= $12-10 | |||||

= $2 per unit | |||||

Break-even Point In Unit = Fixed Cost/ Contribution Margin Per Unit | |||||

= $100000/2 | |||||

=50000 units | |||||

2) | |||||

Revised contribution margin = $12-8 | |||||

=$4 | |||||

Revised fixed cost = $100000+50000 =150000 | |||||

Break-even Point In Unit = Fixed Cost/ Contribution Margin Per Unit | |||||

= $150000/4 | |||||

=37500 units |
|||||

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