Question

Shawn Pen & Pencil Sets Inc. has fixed costs of $309,400. Its product currently sells for $13 per unit and has variable costs of $6.20 per unit. Mr. Bic, the head of manufacturing, proposes to buy new equipment that will cost S390,000 and drive up fixed costs to $433,500. Although the price will remain at $13 per unit, the increased automation will reduce costs per unit to $4.50. a. Compute the following break-even points. (Do not round intermediate calculations.) Current break-even point Proposed new break-even point units units b. As a result of Bic's suggestion, will the break-even point go up or down? O The break-even point will go down. The break-even point will go up.

Answer 1

A	B	C	D	E	F	G	H	I	J	K
2
3		Breakeven units are number of units that company needs to produce to cover its fixed and variable costs.
4		Breakeven units can be calculated using the following formula:
5
6		Break-even Units	=Fixed Costs/Contribution margin per unit
7
8
9		Calculation of current breakeven point:
10		Price of the product	$13
11		Variable cost of the product	$6.20
12		Contribution margin per unit	=Price of the product-Variable cost per unit
13			$6.80	=D10-D11
14
15		Fixed Cost	$309,400
16		Contribution margin per unit	$6.80
17
18		Break-even Units	=Fixed Costs/Contribution margin per unit
19			45,500	=D15/D16
20
21		Hence current breakeven point is	45,500
22
23		Calculation of current breakeven point:
24		Price of the product	$13.00
25		Variable cost of the product	$4.50
26		Contribution margin per unit	=Price of the product-Variable cost per unit
27			$8.50	=D24-D25
28
29		Fixed Cost	$433,500
30		Contribution margin per unit	$8.50
31
32		Break-even Units	=Fixed Costs/Contribution margin per unit
33			51,000	=D29/D30
34
35		Hence new breakeven point is	51,000
36
37		Thus the breakeven point goes up.
38