Question

Maya Company manufactures a product which sells for $20 each. Each unit of product has a variable cost of $5 to manufacture. Fixed costs normally incurred are $60,000. Maya Company is considering automating the manufacturing process, which would require a capital investment which would increase fixed costs by $30,000. As a result of the automation, variable costs would decrease by 20%. What would the new breakeven level in units be for Maya Company if it decides to automate the manufacturing process?

Answer 1

5,625 units

Step-by-step explanation:

As provided,

Selling price of the product = $20 for each unit

Variable cost associated with this = $5 per unit

Current fixed cost = $60,000

In case of automation,

Revised fixed cost = $60,000 + $30,000 = $90,000

Revised variable cost = $5 - 20% = $4 each unit

Revised contribution = $20 - $4 = $16

Break-even level in units, in case of automation = $90,000/$16 = 5,625 units