Question

A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two alternatives, A and B, have been identified, and the associated costs and revenues have been estimated. Annual fixed costs would be $39,000 for A and $21,000 for B; variable costs per unit would be $10 for A and $11 for B; and revenue per unit would be $15. Determine each alternative's break-even point in units. (Round your answer to the nearest whole amount.)

Answer 1

Alternative A : 7,800 units

Alternative B: 5,250 units

Step-by-step explanation:

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

Were:

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

for A:

15 - 10 = 5 contrbution margin

each unit contributes 5 dollars

then: $39,000 fixed cost / $5 per unit = 7,800 units

It need to sale 7,800 untis to pay the fixed cost generated for alternative A

for B:

15 - 11 = 4 contribution margin

each unit contributes 4 dollars

then: $21,000 fixed cost / $4 per unit = 5,250

It need to sale 5,250 units to pay the fixed cost for this alternative