Homework Answers
Answer a- The formula for break even point= Fixed cost - Contribution margin (where contribution margin = Selling price per unit - variable cost per unit)
For current contribution margin
| Selling price per unit | $21 |
| Variable Cost per unit | $9.40 |
| Contribution margin | 11.6 |
Current Break even point = Fixed cost/ Contribution margin
=481400/11.6 = 41500
This means that the company has to sell 41500 units of the product to get enough money to pay its fixed costs.
For Proposed new contribution margin
| Selling price per unit | $21 |
| Variable Cost per unit | $6.50 |
| Contribution margin | 14.5 |
Proposed new Break even point = Fixed cost/ Contribution margin
= 623500/14.5 = 43000
This means that the company will have to sell 43000 units of product to cover its fixed costs.
Answer b- As a result of Bang's suggestion, the break even point will go up as the break even point is going from 41,500 units to 43,000 units.
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