Question

The Doral company manufactures and sells pens. 5,600,000 units are sold per year at $0.50 per unit. Fixed costs are $870,000 per year. Variable costs = $0.30 per unit.

1. What is the current breakeven point in revenues?

2. A $0.05 per unit increase in variable costs results in a new operating (income or loss?) of $?

3. A 10% increase in fixed costs and a 10% increase in units sold results in a new operating (income or loss?) of $?

4. A 30% decrease in fixed costs, 30% decrease in selling price, a 20% decrease in variable cost per unit and a 40% increase in units sold results in a new operating (income or loss?) of $?

5. A 10% increase in fixed costs creates a new breakeven point at ???? units.

6. A 10% increase in selling price and a $40,000 increase in fixed costs creates a new breakeven point at ??? units

Answer 1

1	Current Breakeven point in revenue
	Breakeven point = Fixed cost/contribution margin ratio
	Fixed cost	$870,000
	Selling price per unit	$0.50
	Variable cost per unit	$0.30
	Contribution margin	$0.20
	Contribution margin ratio	40%	(0.20/0.50)
	Breakeven point in revenue	$2,175,000	(870000/40%)
2	New operating income or loss for 5600000 units
		Per unit	Total
	Sales revenue	$0.50	$2,800,000
	Variable cost (0.30+0.05)	$0.35	$1,960,000
	Contribution margin	$0.15	$840,000
	Fixed Cost		$870,000
	New operating loss		($30,000)
3	New operating income or loss for 6160000 units (5600000+560000)
		Per unit	Total
	Sales revenue	$0.50	$3,080,000
	Variable cost	$0.30	$1,848,000
	Contribution margin	$0.20	$1,232,000
	Fixed Cost (870000+87000)		$957,000
	New operating income		$275,000
4	New operating income or loss for 7840000 units (5600000+2240000)
		Per unit	Total
	Sales revenue (0.50-(30%*0.50))	$0.35	$2,744,000
	Variable cost (0.30-(0.30*20%))	$0.24	$1,881,600
	Contribution margin	$0.11	$862,400
	Fixed Cost (870000-261000)		$609,000
	New operating income		$253,400
5	New breakeven points in units
	Breakeven point = Fixed cost/contribution margin
	Fixed Cost (870000+87000)	$957,000
	Selling price per unit	$0.50
	Variable cost per unit	$0.30
	Contribution margin	$0.20
	Breakeven point in revenue	4,785,000	(957000/0.20)
6	New breakeven points in units
	Breakeven point = Fixed cost/contribution margin
	Fixed Cost (870000+40000)	$910,000
	Selling price per unit (0.50+0.05)	$0.55
	Variable cost per unit	$0.30
	Contribution margin	$0.25
	Breakeven point in revenue	3,640,000	(910000/0.25)