Question

Bates Company currently produces and sells 5,000 units of a product that has a contribution margin of $5 per unit. The company sells the product for a sales price of $20 per unit. Fixed costs are $20,000. The company has recently invested in new technology and expects the variable cost per unit to fall to $12 per unit. The investment is expected to increase fixed costs by $15,000. After the new investment is made, how many units must be sold to break-even and what are the sales dollars at the new breakeven point? Show your work.

BE Units: _____________________

BE Sales Dollars: _________________

Answer 1

Before Investment:

Selling Price per unit = $20

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
$5 = $20 - Variable Cost per unit
Variable Cost per unit = $15

Fixed Costs = $20,000

After Investment:

Selling Price per unit = $20
Variable Cost per unit = $12

Fixed Costs = $20,000 + $15,000
Fixed Costs = $35,000

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $20 - $12
Contribution Margin per unit = $8

Breakeven Point in units = Fixed Costs / Contribution Margin per unit
Breakeven Point in units = $35,000 / $8
Breakeven Point in units = 4,375

Breakeven Point in dollars = Breakeven Point in units * Selling Price per unit
Breakeven Point in dollars = 4,375 * $20
Breakeven Point in dollars = $87,500