Question

In 2016, Carow sold 3,000 units at $500 each. Variable expenses were $250 per unit, and fixed expenses were $500,000. The same selling price is expected for 2017. Carow is tentatively planning to invest in equipment that would increase fixed costs by 20%, while decreasing variable costs per unit by 20%. What is Carow's break-even point in units for 2017? Select one:

Answer 1

Answer:

2,000 units

Explanation:

In this question we use the formula of break-even point in unit sales which is shown below:

= (Fixed expenses) ÷ (Contribution margin per unit)

where,  

Fixed expenses would be

= $500,000 × 120%

= $600,000

As fixed expense is increased by 20% so it would be 100 + 20 = 120%

Contribution margin per unit = Selling price per unit - Variable expense per unit

= $500 - $250 × 80%

= $500 - $200

= $300

As variable expense per unit is decreased by 20% so it would be 100 - 20 = 80%

Now put these values to the above formula  

So, the value would equal to

= ($600,000) ÷ ($300)

= 2,000 units