Question

4.Kent Manufacturing produces a product that sells for $60.00. Fixed costs are $198,000 and variable costs are $24.00 per unit. Kent can buy a new production machine that will increase fixed costs by $11,880 per year, but will decrease variable costs by $3.60 per unit. Compute the revised break-even point in dollars with the purchase of the new machine.

• $330,000.
• $300,000.
• $349,800.
• $264,000.

Answer 1

Revised BEP in dollars with purchase of new machinery:

Revised Fixed cost = $198,000 + $11,880

= 209880

Revised Variable cost per unit = $24 - $3.60

= $20.4 per unit

Revised contribution per unit ( Sales - variable cost) = $60 - $20.4

= $39.6 per unit

Revised Break even point ( in units) = Revised Fixed costs / Revised Contribution per unit

= 209880 / 39.6

= 5300 units

Revised Break even point ( in dollars) = Sales price per unit x Break even point in units

= $60 x 5300 units

= $318,000

We can also calculate break even point in dollars using another formula.

Break even point in dollars = Fixed cost / Contribution margin ratio.

= 209880 / 66%

= $318,000

Note :

Contribution margin ratio= contribution / sales x 100

= 39.6 / 60 x 100

= 66%