Question

Currently, the unit selling price of a product is $350, the unit variable cost is $290, and the total fixed costs are $780,000. A proposal is being evaluated to increase the unit selling price to $390.

Required:
a. Compute the current break-even sales (units).
b. Compute the anticipated break-even sales (units), assuming that the unit selling price is increased to the proposed $390, and all costs remain constant.

Answer 1

a).
`\text{The contribution margin per unit = }`
`\text{selling price per unit - variable cost per unit}`

= $ 350 - $ 290

= $60

The current break even sales =
`$\frac{\text{fixed cost}}{\text{contribution margin per unit}}$`

`$=(780,000)/(60)$`

= 13,000 units

Therefore, the current break-even sales (units) = 13,000 units

b). The Contribution Margin Ratio = Selling Price Per Unit - Variable Cost Per Unit

= $390 - $290

= $ 100

`$\text{Break even sales}=\frac{\text{fixed cost}}{\text{contribution margin per unit}}$`

`$=(780,000)/(100)$`

= 7,800 units.

So, the answer is 7800 units.