Question

Flying Cloud Co. has the following operating data for its manufacturing operations: Unit selling price $209 Unit variable cost $102 $755,000 Total fixed costs The company has decided to increase the wages of hourly workers which will increase the unit variable cost by 10%. Increases in the salaries of factory supervisors and property taxes for the factory will increase fixed costs by 4%. If sales prices are held constant, the next break-even point for Flying Cloud Co. will be a. Increased by 844 units b. increased by 1,055 units c. decreased by 1,055 units d. increased by 1,267 units

Answer 1

Current position

Selling price per unit = $209

Variable cost per unit = $102

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

= 209-102

= $107

Fixed costs = $755,000

Break even point in units = Fixed costs/Contribution margin per unit

= 755,000/107

= 7,056 units

New Position

Selling price per unit = $209

Increase in variable costs = 10%

New variable cost = Old variable cost x 110%

= 102 x 110%

= $112.20

Contribution margin per unit = Selling price per unit -New variable cost

= 209-112.20

= $96.80

Increase in fixed cost = 4%

New fixed costs = Old fixed cost x 104%

= 755,000 x 104%

= $785,200

Break even sales in units = New fixed costs /Contribution margin per unit

= 785,200/96.80

= 8,111 units

Increase in break even point = New break even point - Old break even point

= 8,111-7,056

= 1,055 units

If sales price are held constant, the next break even point for Flying Cloud co. will increase by 1,055 units.

Correct option is b.

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