Question

Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester's current break-even sales are $400,000 and current break-even units are 4,000. If Forrester purchases this new equipment, the revised contribution margin ratio would be:

Answer 1

40%

Step-by-step explanation:

As we know that

The contribution margin ratio equals to

= (Contribution margin) ÷ (Selling price per unit) × 100

where,

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

= $100 - $60

= $40

And, the selling price per unit is $100

So, the revised contribution margin ratio would be

= ($40 ÷ 100) × 100

= 40%

Since the variable cost is decreased by 10

So, the revised variable cost would be

=- $70 - $10

= $60 per unit

Answer 2

new BEP in units = 3,750

Contribution Margin Ratio 0.40

Step-by-step explanation:

The variable cost decrease by $10 to $60 from 70

The fixed cost increase by 30,000 to $150,000 from $120,000

sales remains at $100

`(Fixed\:Cost)/(Contribution \:Margin) = Break\: Even\: Point_(units)`

`(Contribution \: Margin)/(Sales \: Revenue) = Contribution \: Margin \: Ratio`

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

100 - 60 = 40 CM Each units contribution is $40

40/100 = 0.40 CMR for each dolalr of sales 40 cents are contribution

150,000/40 = 3,750 by selling 3,750 the company can afford to pay their fixed cost.