Question

Mae Company sells its product for $12 per unit and has variable costs of $8 per unit. Total fixed costs are $60,000. Suppose variable costs increase by 10% due to an increase in the cost of direct materials. What will be the effect on the breakeven point in units

Answer 1

Effect : Increase in Break Even units by 3,750 units to 18,750 units

Step-by-step explanation:

Break even point is the level of activity at which a firm makes neither a profit nor a loss

Break even Point (Units) = Fixed Costs ÷ Contribution per unit

where,

Contribution per unit = Selling price per unit - Variable Costs per unit

= $12 - $8

= $4

Therefore,

Before Increase

Break even Point (Units) = $60,000 ÷ $4 = 15,000

After Increase

New Contribution = $12 - ($8× 1.10)

= $3.20

Therefore,

Break even Point (Units) = $60,000 ÷ $3.20 = 18,750