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? Multiple Choice 4,444 unit increase. 9,850 unit decrease. 5,714 unit increase. 4,444 unit decrease. No effect.

Answer 1

No effect.

Step-by-step explanation:

Using the CVP analysis.

Break-even point = fixed cost/ contribution unit per unit

With the old machine,

fixed costs are $28,000

contribution margin = $5- $3.60 = $1.40

Break-even = $28000/$1.40

Break-even = 20,000 units

With the new machine

Fixed costs will be $28,000 + 8,000= $36,000

contribution margin : $5 - ($3.60 - $0.40)

contribution margin = $5- $3.20= $1.80

Break-even point = $36,000/ $1.80

Break -even is 20,000 units

There would be no effect on the break-even point.