Question

Annual fixed costs for a product are $75,000. The product itself sells for $6 and it costs $2 in variable costs to make each product.

By how many units will the annual break-even point for the product change if the variable cost per unit goes up to $2.50?

Answer 1

Given

Annual fixed costs for a product are $75,000.

The product i sells for $6

it costs $2 in variable costs to make each product.

the variable cost per unit goes up to $2.50

find out how many units will the annual break-even point for the product change .

To proof

FORMULA

Break even = Fixed cost ÷ Contribution margin per unit

where

Contribution margin per unit = sale price - variable price

Take two cases

Case first

fixed costs for a product = $75,000

product itself sells = $6

variable costs = $2

put all the value in the above equation

we get

Contribution margin per unit = 6 - 2

= 4

`Break even (say B1 ) = (75000)/(4)`

= 18750 units

CASE SECOND

the variable cost per unit goes up to $2.50

put value inthe formula

Contribution margin per unit = 6 - 2.50

= 3.5

`Break even (say B2 ) = (75000)/(3.5)`

we get

Breakeven (sayB2) = 21428.6 unit

change in the break even product = B2- B1

= 21428.6 - 18750

= 2678.6 unit

Hence proved