Question

Waterway Company produces flash drives for computers, which it sells for $20 each. Each flash drive costs $10 of variable costs to make. During April, 1600 drives were sold. Fixed costs for April were $3 per unit for a total of $4800 for the month. If variable costs decrease by 20%, what happens to the break-even level of units per month for Waterway Company?

a)It is 20% higher than the original break-even point.

b)It decreases about 80 units.

c)It decreases about 96 units.

d) It depends on the number of units the company expects to produce and sell.

Answer 1

Option b is Correct.

Break Even Units = Fixed Cost / Contribution Margin per Unit

Contribution Margin = Unit Sale price - Unit Variable cost

Current Situation:

Contribution Margin per unit = $20 - $10 = 10

Break Even Units = 4,800/ 10

Break Even Units = 480 Units

Proposed Situation:

Proposed Variable cost per unit = $10 * (1 - 0.20) = $8

Proposed Contribution Margin = $20 - $8 = 12

Proposed Break Even Units = 4,800 / 12

Proposed Break Even Units = 400 Units

Change in Break Even Units = 400 Units - 480 Units

Change in Break Even Units = -80 Units

Therefore, break even units decreases by 80 units.