Question

Kumar produces large decorative tiles used in home decor. The tiles sell for $ 740 and the fixed monthly operating costs are as​ follows: Rent and utilities $ 800 Management salaries 2 comma 500 Other expenses 520 ​Kumar's accountant told him about contribution margin ratios and he understood clearly that for every dollar of​ sales, $ 0.60 went to cover his fixed​ costs, and that anything past that point was pure profit. ​Kumar's is planning to increase the selling price to $ 840 . What impact will the increase in selling price have on the breakeven point in​ units?

Answer 1

Solution:
	It will go down from 9 to 8 units
Working Notes:
	Current contribution margin per unit = Selling price per unit x Contribution per $ of sales
		=$740 x 0.60
		=$444
	Current Break even point units	=Current monthly fixed cost/Current contribution margin per unit
	Current monthly fixed cost = Rent + salaries + other
		=$800+$2,500+520
		=$3,820
	Current Break even point units	=Current monthly fixed cost/Current contribution margin per unit
		=$3,820/$444
		=8.60360 units
		=9 units
	When selling price becomes $840
	Revised contribution margin = Current contribution margin +(New selling price - Current selling price)
		=$444 +($840-$740)
		=$544
Now	Revised break even point = Total monthly cost / revised contribution margin per unit
		=$3,820/$544
		=7.0220588 units
		=8 units
Hence	Break even point in units will go down from 9 units to 8 units
Notes:	Product cannot be sold , sub part , hence , break even units are rounded off to upper nearest whole number.
Please feel free to ask if anything about above solution in comment section of the question.