Question

Mullis Corp. manufactures DVDs that sell for $5.80. Fixed costs are $31,000 and variable costs are $3.80 per unit. Mullis can buy a newer production machine that will increase fixed costs by $3,100 per year, but will decrease variable costs by $0.20 per unit. What effect would the purchase of the new machine have on Mullis' break-even point in units?

Answer 1

The break even point in units will remain unchanged

Step-by-step explanation:

The formula to compute the break even point is shown below:

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

where,

Contribution margin per unit = Selling price per unit - Variable expense per unit

= $5.80 - $3.80

= $2.00

And, the fixed cost is $31,000

So, the break even point would be

= ($31,000) ÷ ($5.8 - $3.8)

= $31,000 ÷ $2

= 15,500 units

Now if the variable cost per unit is decreased and the fixed cost is increased so the break even would be

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

where,

Contribution margin per unit = Selling price per unit - Variable expense per unit

= $5.80 - $3.60

= $2.20

And, the fixed cost is $31,000 + $3,100 = $34,100

So, the break even point would be

= ($34,100) ÷ ($5.80 - $3.60)

= $34,100 ÷ $2.20

= 15,500 units

The break even point in units will remain unchanged