Question

Keene, Inc. produces flash drives for computers, which it sells for $20 each. Each flash drive costs $6 of variable costs to make. During March, 1,000 drives were sold. Fixed costs for March were $5.60 per unit for a total of $5,600 for the month. If variable costs decrease by 10%, what happens to the break-even level of units per month for Keene?

a) It decreases about 40 units.
b) It is 10% higher than the original break-even point.
c) It depends on the number of units the company expects to produce and sell.
d) It decreases about 16 units.

Answer 1

D) It decreases about 16 units.

Step-by-step explanation:

Currently Keene's break even point in units = total fixed costs / contribution margin

total fixed costs = $5,600

contribution margin = selling price - contribution margin = $20 - $6 = $14

Keene's current break even point = $5,600 / $14 = 400 units

If Keene's variable costs decrease by 10%, the new contribution margin will be = $20 - $5.40 = $14.60

Keene's new break even point = $5,600 / $14.60 = 383.56 ≈ 384 units

this represents a 4% decrease (16 units less)