Question

2. Pure Water is considering buying new production equipment. The new equipment will increase fixed costs by $200,000 per year and will decrease variable cost of the faucet and pitcher units by $5 and $10, respectively. Assuming the same sales mix, how many of each type of filter does Pure Water need to sell to breakeven

Answer 1

Answer and Explanation:

The computation is shown below:

But before that we need to do the following calculations which are shown below:

The Contribution per unit of faucet is

= $75 - $15

= $60

And, the Contribution per unit of pitcher filter is

= $100 - $30

= $70

Now Contribution per unit in present sales mix is

= [($60 × 2) + ($70 × 3)] ÷ 5

= ($120 + $210) ÷ 5

= $66 per unit

And

The Fixed cost is

= $1,000,000 + $200,000

= $1,200,000

Now

Break even units is

= $1,200,000 ÷ $66 per unit

= 18,181.81 units

For faucet, it is

= (18,181.81 × 2) ÷ 5

= 7,272.72 units

For pitcher filter, it is

= (18,181.81 × 3) ÷ 5

= 10,909.086 units