Question

Kent Manufacturing produces a product that sells for $120.00. Fixed costs are $179,400 and variable costs are $36.00 per unit. Kent can buy a new production machine that will increase fixed costs by $12,480 per year, but will decrease variable costs by $9.60 per unit. Compute the revised break-even point in dollars with the purchase of the new machine.

Answer 1

$246,000

Step-by-step explanation:

Break even point is computed as

= Fixed costs ÷ Contribution margin

With the purchase of a new production machine, total fixed costs would increase by $12,480.

New total fixed costs = $179,400 + $12,480 = $191,880

New Contribution margin = Sales price per unit - Variable cost per unit

= [$120 - ($36 - $9.6)]

= $120 - $26.4

= $93.6

New break even point in unit of output = $191,880 ÷ $93.6

= 2,050 units

Therefore,

New break even (dollars) = 2,050 × $120 = $246,000