Question

Aberzombie purchases denim jeans from manufacturer oversees. The current purchase price is $9.2 per unit. Efforts to improve quality has prompted sourcing to consider making the jeans in-house. Annual sales should increase from 150,000 to 600,000 units. Fixed costs would increase by about $1,125,000 per year for the new equipment and tooling needed. The cost of raw materials and variable overhead would be about $2 per unit, and labor costs would be $3 per unit produced.What is the break-even quantity? _________ units (Enter your response rounded to the nearest whole number.)

Answer 1

234,375 units

Step-by-step explanation:

The computation of the break-even quantity is shown below:

= (Fixed cost) ÷ (Contribution margin per unit)

where,

Contribution margin per unit = Selling price per unit - variable cost per unit

= $9.2 per unit - $2 per unit - $3 per unit

= $4.8

So, the break even quantity would be

= $1,125,000 ÷ $4.8

= 234,375 units

We assume the current purchase price would be equal to selling price per unit