Question

Mae Company sells its product for​ $7 per unit and has variable costs of​ $3 per unit. Total fixed costs are​ $72,000. Suppose variable costs increase by​ 20% due to an increase in the cost of direct materials. What will be the effect on the breakeven point in​ units?

Answer 1

Step-by-step explanation:

The computation of the break even point in units is shown below:

= (Fixed cost) ÷ (contribution margin per unit)

where,

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

= $7 - $3

= $4

And, the fixed cost is $72,000

Now put these values to the above formula

So, the per unit would be equal to

= $72,000 ÷ 4 per unit

= 18,000 units

Now the variable cost is increased by 20%

So, the new variable cost per unit equals to

= $3 + $3 × 20%

= 3.6

So, the new contribution margin = $7 - $3.4 = $3.6

So, the per unit would be equal to

= $72,000 ÷ 3.6 per unit

= 21,176.47 units

Hence, the break even point is increased