Question

Homework: Chapter 7 Homework Save Score: 0 of 3 pts 6 of 15 (0 complete) HW Score: 0%, 0 of 72 pts S7-6 (similar to) Question Help Ocean Cruiseline offers nightly dinner cruises departing from several cities on the eastern coast of the United States including Charleston, Baltimore, and Alexandria. Dinner cruise tickets sell for $50 per passenger. Ocean Cruiseline's variable cost of providing the dinner is $20 per passenger, and the fixed cost of operating the vessels (depreciation, salaries, docking fees, and other expenses) is $270,000 per month. Under these conditions, the breakeven point in tickets is 9,000 and the breakeven point in sales dollars is $450,000. Suppose Ocean Cruiseline embarks on a cost reduction drive and slashes fixed expenses from $270,000 per month to $255,000 per month. Read the requirements. 1. Compute the new breakeven point in units and in sales dollars. Begin with the breakeven point units. Enter the formula, then compute the breakeven point. (For amounts with a $0 balance, make sure to enter "0" in the appropriate cell.) = Breakeven units i Requirements 1. Compute the new breakeven point in units and in sales dollars. 2. Is the breakeven point higher or lower than under the original conditions? Explain how changes in fixed costs generally affect the breakeven point. Print Done

Answer 1

1. (Fixed costs + Target profit)/Contribution margin per unit = Breakeven unit

($255000 + $0)/$30 = 8500

2. The breakeven point is lower than under the original conditions.

A change in the amount of fixed costs impacts the breakeven point directly. An increase in fixed costs results in an increase in the breakeven point and vice versa. With the contribution margin remaining constant, with a decrease in fixed costs, lesser number of units are required to be sold to cover the fixed costs while with an increase in fixed costs, the number of units to be sold to cover the fixed costs increases.