Question

Mullis Corp. manufactures DVDs that sell for $5.00. Fixed costs are $28,000 and variable costs are $3.60 per unit. Mullis can buy a newer production machine that will increase fixed costs by $8,000 per year, but will decrease variable costs by $0.40 per unit. What effect would the purchase of the new machine have on Mullis' break-even point in units?

Answer 1

The break-even point in units can be calculated using the formula: Break-even point = Fixed costs / (Selling price per unit - Variable costs per unit). Before the purchase of the new machine, the break-even point is 10,000 units. After the purchase of the new machine, the break-even point is 7,000 units. Therefore, the purchase of the new machine would decrease the break-even point in units.

Step-by-step explanation:

The break-even point in units can be calculated using the formula:

Break-even point = Fixed costs / (Selling price per unit - Variable costs per unit)

Before the purchase of the new machine, the fixed costs are $28,000 and the variable costs are $3.60 per unit. Therefore, the break-even point is:

Break-even point = $28,000 / ($5.00 - $3.60) = 10,000 units

After the purchase of the new machine, the fixed costs increase by $8,000 and the variable costs decrease by $0.40 per unit. Therefore, the break-even point with the new machine is:

Break-even point = ($28,000 + $8,000) / ($5.00 - $3.60 + $0.40) = 7,000 units

So, the purchase of the new machine would decrease Mullis Corp.'s break-even point in units from 10,000 to 7,000 units.