Question

Digby has a new design for their product Drat next round that can reduce their material cost of producing units from $8.14 to $7.32. Digby passes on half of all cost savings by cutting the current price to customers. For simplicity:

- Use current labor costs of $3.92
- Assume all period costs as reported on Digby's Income Statement (Annual Rpt Pg 2) will remain the same.

Determine how many units (000) of product Drat would need to be sold next round to break even on the product.
Drat

Sales 35,104
Variable Cost
Direct Labor 7425
Direct Material 15644
Inventory Carry 259
Total Variable 23328

Contribution Margin 11776

Period Cost
Depreciation 4753
SG&A RD 0
Promotion 1140
Sales 1000
Admin 392
Total Period 7286

Net Margin 4491

Drat Units Sold 1848
Drat Price Per Unit $19
Material Cost $8.14
Labor Cost $3.92

Select:
a. 991 units.
b. 939 units.
c. 1,049 units.
d. 1,666 units.
e. 1,288 units.
f. 793 units.

Answer 1

To break even on product Drat, Digby needs to sell approximately 939 units. Therefore, the correct option is B

Step-by-step explanation:

To determine the number of units of product Drat that would need to be sold next round to break even, we need to calculate the contribution margin per unit. The contribution margin per unit is the difference between the selling price per unit ($19) and the variable cost per unit ($7.32 + $3.92), which is $7.76.

Next, we divide the total period costs ($7,286) by the contribution margin per unit ($7.76) to get the break-even point in units:

Break-even point = Total period costs / Contribution margin per unit = $7,286 / $7.76 ≈ 939 units

Therefore, the correct answer is option b. 939 units.