Question

The Warren Watch Company sells watches for $29, fixed costs are $100,000, and variable costs are $13 per watch.

1. What is the firm's gain or loss at sales of 8,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent.
   $
   
   What is the firm's gain or loss at sales of 20,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent.
   $
2. 
   
3. What is the break-even point (unit sales)? Round your answer to the nearest whole number.
   units
4. 
   
5. What would happen to the break-even point if the selling price was raised to $33?
   -Select-The result is that the break-even point remains unchanged. The result is that the break-even point is lower. The result is that the break-even point is higher. Item 4
6. 
   
7. What would happen to the break-even point if the selling price was raised to $33 but variable costs rose to $22 a unit? Round your answer to the nearest whole number.
   -Select-The result is that the break-even point remains unchanged. The result is that the break-even point increases. The result is that the break-even point decreases. Item 5

Answer 1

Answer a.

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $29 - $13
Contribution Margin per unit = $16

If number of units sold is 8,000:

Operating Income = Contribution Margin per unit * Units Sold - Fixed Expenses
Operating Income = $16 * 8,000 - $100,000
Operating Income = $28,000

If number of units sold is 20,000:

Operating Income = Contribution Margin per unit * Units Sold - Fixed Expenses
Operating Income = $16 * 20,000 - $100,000
Operating Income = $220,000

Answer b.

Breakeven Point = Fixed Expenses / Contribution Margin per unit
Breakeven Point = $100,000 / $16
Breakeven Point = 6,250 units

Answer c.

If selling price per unit increases to $33, then contribution margin per unit will increase. As a result breakeven point will decrease.

The result is that the break-even point is lower.

Answer d.

If selling price per unit increases to $33 and variable costs per unit increases to $22, then contribution margin per unit will decrease. As a result breakeven point will increase.

The result is that the break-even point increases.