Question

Rosario Company, which is located in Buenos Aires, Argentina, manufactures a component used in farm machinery. The firm’s fixed costs are 3,500,000 p per year. The variable cost of each component is 1,300 p, and the components are sold for 4,000 p each. The company sold 5,900 components during the prior year. (p denotes the peso, Argentina’s national currency. Several countries use the peso as their monetary unit. On the day this exercise was written, Argentina’s peso was worth 0.104 U.S. dollar. In the following requirements, ignore income taxes.)

Required:
Compute the break-even point in units.
What will the new break-even point be if fixed costs increase by 5 percent?

Answer 1

The break-even point in units is approximately 1,296 components. If the fixed costs increase by 5 percent, the new break-even point would be around 1,361 components.

Step-by-step explanation:

The break-even point in units can be calculated by dividing the total fixed costs by the contribution margin per unit. The contribution margin is the selling price per unit minus the variable cost per unit. In this case, the fixed costs are 3,500,000 p and the variable cost per component is 1,300 p. The selling price of each component is 4,000 p. So, the contribution margin per component is 4,000 p - 1,300 p = 2,700 p. Dividing the fixed costs by the contribution margin per component, we get:

Break-even point = 3,500,000 p / 2,700 p = 1,296.30 components

Therefore, the break-even point in units is approximately 1,296 components.

If the fixed costs increase by 5 percent, the new break-even point can be calculated as:

New fixed costs = 3,500,000 p + (3,500,000 p * 5% = 175,000 p) = 3,675,000 p

New break-even point = 3,675,000 p / 2,700 p = 1,361.11 components

Therefore, the new break-even point in units would be approximately 1,361 components.