Question

Break-even analysis [LO5-2] Eaton Tool Company has fixed costs of $278,400, sells its units for $70, and has variable costs of $38 per unit. Compute the break-even point. Ms. Eaton comes up with a new plan to cut fixed costs to $220,000. However, more labor will now be required, which will increase variable costs per unit to $41. The sales price will remain at $70. What is the new break-even point?

Answer 1

The original break-even point for Eaton Tool Company is 7,960 units. After reducing fixed costs and increasing variable costs, the new break-even point is 6,286 units.

Step-by-step explanation:

To calculate the break-even point for Eaton Tool Company, we need to determine the point where total revenue equals total costs, which comprise fixed costs and variable costs per unit. The break-even point in units can be calculated using the formula: Break-Even Point (units) = Fixed Costs / (Sale Price per Unit - Variable Cost per Unit).

For the initial scenario, we have fixed costs of $278,400, a selling price of $70 per unit, and variable costs of $38 per unit. Using the formula, we get: Break-Even Point (units) = $278,400 / ($70 - $38) = 7,960 units.

With Ms. Eaton's new plan, the fixed costs are reduced to $220,000, but the variable costs per unit increase to $41. The new break-even point is: Break-Even Point (units) = $220,000 / ($70 - $41) = 6,286 units.