Question

Moe's Garage management has budgeted the following amounts for its next fiscal year: Total fixed expenses $1,000,000 Selling price per unit $245 Variable expenses per unit $205If Moe's can reduce fixed expenses by $5000, by how much can variable expenses per unit increase and still allow the company to maintain the original breakeven sales in units? $205.20 $39.80 $40.00 $0.20

Answer 1

Contribution margin per unit = sales price per unit - variable cost per unit

= $245 - $205 = $40

Break even point (unit sales) = fixed expenses/contribution margin per unit

= $1000000/$40

= 25000 units

now,

when the fixed costs decrease by $5000, in order to maintain the same level of break even sales, total variable expense need to be increased by $5000.

therefore,

Required increase in variable expenses per unit = $5000/25000

= $0.20