Question

Richland Enterprises has budgeted the following amounts for its next fiscal year: Total fixed expenses $47,000 Selling price per unit $65 Variable expenses per unit $40 If Richland Enterprises can reduce fixed expenses by $12,825, how will breakeven sales in units be affected? O A. Decrease by 513 units OB. Decrease by 122 units O C. Increase by 513 units OD. Increase by 122 units

Answer 1

Break-Even Point: The point where the entity neither gains any profit nor suffers any loss in terms of the sales units is known as Break-Even Point. Break-Even Point in units is calculated by dividing fixed costs by contribution margin per unit. Fixed Costs Break-Even Point in units = , Contribution Margin per unit Contribution Margin per unit: Contribution margin per unit is the difference between sales price per unit and variable cost per unit. It is determined by subtracting Variable cost per unit from Sales price per unit. Contribution Margin per unit = Sales price per unit - Variable Cost per unit As per the details given in question, Fixed Costs = $47,000 Sales Price Per Unit = $65 Variable Cost Per Unit = $40 Five Fixed Costs Break-Even Point in units = . Contribution Margin per unit Break - Even Point in Units = $47,000 $65 - $40 = 1,880 units Now, if fixed expenses are reduced by $12,825 then the updated information is given below: Fixed Costs = $47,000 - $12,825 = $34,175 Sales Price Per Unit = $65 Variable Cost Per Unit = $40 Break-Even Point in units = Fixed Costs Contribution Margin per unit Break - Even Point in Units = $34,175 $65 - $40 = 1,367 units Now, effect on Break-Even point of such decrease in fixed assets = 1,880 units – 1,367 units = 513 units. Break-Even Point in units is decreased by 513 units. Therefore, Option A is the correct answer.