Question

In year 1 Frodo Company has variable costs of $80 per unit, total fixed costs of $200,000, and a break-even point of 5,000 units. If the company raises the sales price per unit by $10 the following year, how many units must Frodo Company sell to break even in Year 2?
A.
3,000 units
B.
4,000 units
C.
6,000 units
D.
5,000 units

Answer 1

We know Break even point (in units) = Total Fixed Cost/ (sales - variable cost) per unit

In the above problem, BEP (in units) = 5000; Total Fixed cost = $200000; Variable cost per unit = $80

Thus 5000 = 200000/(sales - 80)

sales - 80 = 200000/5000 = 40

Sales = 40 + 80 = $120 per unit

In the following year sales per unit is increased by $10

New sales price per unit = $120 + $10 = $130 per unit

Hence, from the above formula,

BEP (in units) = $200000/ ($130 - $80) = $200000/ $50 = 4000 units

Thus option B is the correct answer.