Incomplete question. The full question read;
Oleck Inc. produces stereo components that sell at P = $100 per unit. Oleck’s fixed costs are $200,000, variable costs are $50 per unit, 5,000 components are produced and sold each year, EBIT is currently $50,000, and Oleck’s assets (all equity financed) are $500,000. Oleck can change its production process by adding $400,000 to assets and $50,000 to fixed operating costs. This change would (1) reduce variable costs per unit by $10 and (2) increase output by 2,000 units, but (3) the sales price on all units would have to be lowered to $95 to permit sales of the additional output. Oleck has tax loss carry-forwards that cause its tax rate to be zero, it uses no debt, and its average cost of capital is 10%.
Would Oleck’s break-even point increase or decrease if it made the change? Calculate old and new break-even points
a) Old break-even point = units
b) New break-even point = units
c) Increase or decrease?
Answer:
a) 4,000 units
b) 4,545 units
c) increase
Step-by-step explanation:
To find the break-even point based on units, we use the formula = Total Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit).
Old break-even point:
- The Total fixed cost = $200,000
- The Revenue per unit = $100
- The Variable Cost per Unit= $50 - $10 = $40
∴ Old break-even point (units) =
= 4,000 units
New break-even point:
- The Total fixed cost = $200,000 + $ 50,000 = $250,000
- The Revenue per unit = $100 redeced to $95 = $95.
- The Variable Cost per Unit= $50 - $10 = $40
∴ New break-even point (units) =
= 4,545 units