Question

Benson Company produces flash drives for computers which have variable costs of $10 per flash drive to produce. Each flash drive sells for $20 each. During the current month, 1,000 flash drives were sold. Fixed costs for the current month were $4,500. If variable costs increase by 10%, what happens to the breakeven level in units for the month for Benson Company? It is 10% lower than the original breakeven point. It depends on the number of units the company expects to produce and sell. It increases by 50 units. It is 10% higher than the original breakeven point.

Answer 1

It increases by 50 units.

Step-by-step explanation:

Current break even point =
`(Fixed\:Cost)/(Contribution\:per\:unit)`

Here, fixed cost = $4,500

Contribution per unit = Selling price - Variable Cost = $20 - $10 = $10

Current break even point =
`(4,500)/(10) = 450 units`

If variable cost increase by 10% then revised variable cost = $10 + 10% = $11

Contribution per unit = $20 - $11 = $9 per unit

Break even sales in units =
`(4,500)/(9) = 500 units`

Difference in original and revised break even = Revised - Original = 500 - 450 units = 50 units,

Thus original break even increases by 50 units, = 50/450 = 11.11% increase.

Final Answer

It increases by 50 units.