Question

Stephanie, Inc. sells its product for $40. The variable costs are $18 per unit. Fixed costsare $16,000. The company is considering the purchase of an automated machine thatwill result in a $2 reduction in unit variable costs and an increase of $5,000 in fixedcosts. Which of the following is true about the break-even point in units?

Answer 1

Answer:

The current BEP is                             727 units

with the proposed change it will be 875 units

The change increase the break even point by 148 units

Explanation:

The BEP in units will be:

$\frac{Fixed\:Cost}{Contribution \:Margin} = Break\: Even\: Point_{units}$

Where:

$Sales \: Revenue - Variable \: Cost = Contribution \: Margin$

40 - 18 = 22 contribution margin

then we calcualte BEP

16,000 / 22 = 727,27 units

with the proposed change:

40 - 16 = 24 contribution margin

16,000 + 5,000 = 21,000 fixed cost

21,000 / 24 = 875

875 - 727 = 148