Question

Eduardo industries is planning on purchasing a new piece of equipment that will increase the quality of its production. it hopes the increased quality will generate more sales. the company’s contribution margin ratio is 40%, and its current breakeven point is $350,000 in sales revenue. if the company’s fixed expenses increase by $35,000 due to the equipment, what will its new breakeven point be (in sales revenue)?

1) 20%
2) 40%
3) 60%
4) 80%

Answer 1

To find the new breakeven point in sales revenue, consider the increase in fixed expenses due to the new equipment. Use the formula: New Breakeven Point = (Fixed Expenses + Increase in Fixed Expenses) / Contribution Margin Ratio.

Step-by-step explanation:

To calculate the new breakeven point in sales revenue, we need to consider the increase in fixed expenses due to the new equipment. The contribution margin ratio, which is 40%, represents the portion of each sales dollar that contributes to covering fixed expenses and generating profit. To find the new breakeven point, we can calculate it using the following formula:

New Breakeven Point = (Fixed Expenses + Increase in Fixed Expenses) / Contribution Margin Ratio

Plugging in the values, we get:

New Breakeven Point = ($350,000 + $35,000) / 0.40 = $962,500

Therefore, the new breakeven point in sales revenue is $962,500, which means the company needs to generate at least this amount in sales to cover its fixed expenses and start making a profit.