Question

Oak Cabinet Company has fixed costs of $265,000, sells its units for $66, and has variable costs of $36 per unit.

a. Compute the break-even point.

b. The CFO comes up with a new plan to cut fixed costs to $200,000. However, more labor will now be required, which will increase variable costs per unit to $39. The sales price will remain at $66. What is the new break-even point?

c. Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)?

Answer 1

a) Break even point= Fixed Cost/ Contribution per unit

		Fixed Cost		$265,000
		S.P/ unit		$66
		V.C/ unit		$36
		Contribution/ unit		$30
		Break even point (In units)			8833.33
	b	Fixed Cost		$200,000
		S.P/ unit		$66
		V.C/ unit		$39
		Contribution/ unit		$27
		Break even point (In units)			7407.41

c If the number of units is more than 7,407.41 in new plan the company will start earning the profit.