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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