Question

Golf Accessories Ltd. manufactures golf gloves which sell for an average price of $16.00. Currently, the company employs a number of workers to make the leather gloves, such that variable costs are $12.50 per glove, and the company’s total fixed costs are $350,000 per year. Derry Cale, the owner, is evaluating the acquisition of a new machine which will sew the leather gloves on an automated basis. If the owner acquires the machine, total fixed costs per year will increase to $575,000 but variable costs per glove will be reduced to $11.25 per unit. The owner is interested in the new machine but not if the Break-Even point for the company’s sales for this particular glove would be increased by more than 25%. If the estimates are accurate about total fixed costs and variable costs per unit, What would be the Break-Even point with the new machine?

Answer 1

The break-even point with the new machine would be approximately 32,222 units, and this does not exceed the 25% increase threshold, making the new machine a viable option.

Step-by-step explanation:

Calculation of Break-Even Point with New Machine

To calculate the break-even point, we use the formula:
Break-Even Point (in units) = Total Fixed Costs / (Price per unit - Variable Cost per unit).

With the current machine, the break-even point is:
$350,000 / ($16.00 - $12.50) = 28,000 units.

With the new machine, the break-even point would be:
$575,000 / ($16.00 - $11.25) = 32,222 units approximately.

Next, we calculate the acceptable increased break-even point based on the 25% threshold:
28,000 units x 1.25 = 35,000 units.

Since the calculated break-even point with the new machine, which is 32,222 units, is less than the maximum acceptable break-even point of 35,000 units, acquiring the new machine would not increase the company's break-even point by more than 25%.