Question

Gitli Company sells its product for $ 55 and has variable cost of $ 30 per unit. The total fixed costs are $ 25 comma 000. What will be the effect on the breakeven point in units if variable cost increases by $ 10 due to an increase in the cost of direct​ materials? (Round your answer up to the nearest whole​ unit.) A. It will decrease by 667 units. B. It will increase by 167 units. C. It will decrease by 167 units. D. It will increase by 667 units.

Answer 1

D. It will increase by 667 units.

Step-by-step explanation:

The calculation of break-even point is shown below:-

Contribution Per Unit (before increase in Variable Cost) = Unit sale price - Unit Variable Cost

= $55 - $30

= $25

Break-Even (Units) = Fixed Cost ÷ Division Contribution per unit

= $25,000 ÷ $25

= 1,000

New Variable Cost per unit = $30 + $10 (Increase in Direct material cost) = $40

Selling Price = $55

New Contribution per unit = $55 - $40 = $15

New Break-Even (Units) = Fixed Cost ÷ New Contribution per unit

= $25,000 ÷ $15

= 1,667

Increase in Break-Even Units(after increase in D.M cost) = New Break even point - Old Break even point

= 1,667 - 1,000 units

= 667 units

Therefore, The Break even points units will increase by 667 units, if the D.M cost increases by $10 per unit.