Question

Flying Cloud Co. has the following operating data for its manufacturing operations:

Unit selling price $ 350
Unit variable cost $ 100
Total fixed costs $980,000
The company has decided to increase the wages of hourly workers which will increase the unit variable cost by 10%. Increases in the salaries of factory supervisors and property taxes for the factory will increase fixed costs by 5%. If sales prices are held constant, the next break-even point for Flying Cloud Co. will be:__________
a) increased by 368 units
b) decreased by 368 units
c) increased by 132 units
d) decreased by 264 units

Answer 1

a) increased by 368 units

Step-by-step explanation:

The calculation of the next break even point should be

Existing break-even point for Flying Cloud Co. is

= Fixed Cost ÷ Contribution Margin Per Unit

= Fixed Cost ÷ Sales Price Per Unit - Variable Cost per Unit

= $980,000 ÷ ( $350 - $100)

= 3,920 Units

Now

Revised Variable cost = $100 × 110%

= $110

And,

Revised Fixed cost = $980,000 × 105%

= $1,029,000

So,

Revised break-even point for Flying Cloud Co. is

= Fixed Cost ÷ ( Contribution Margin Per Unit

= Fixed Cost ÷ ( Sales Price Per Unit - Variable Cost per Unit

= $1,029,000 ÷ ( ( $350 -$110)

= 4,287.5

= 4,288 units

So,

Increase = 4,288 Units - 3920 Units

= 368 Units Increase