Question

Eaton Tool Company has fixed costs of $255,000, sells its units for $66, and has variable costs of $36 per unit. a. Compute the break-even point. b. Joe Eaton comes up with a new plan to cut fixed costs to $200,000. However, more labor will now be required, which will increase variable costs per unit to $39. The sales price will remain at $66. What is the new break-even point? c. Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)?

Answer 1

	Answer =A)
	CALCULATION OF CONTRIBUTION MARGIN
	PARTICULARS	AMOUNT
	Selling Price Per Unit=	$                           66
	Less: Variable Cost Per Unit	$                           36
	Contribution Margin Per Unit	$                           30
	CALCULATION OF THE BREAK EVEN POINT IN UNITS
	Break Even point =      Fixed Cost / Contribution Margin Per Unit
	Break Even point =
	Fixed Cost =	$               2,55,000
	Divide By	"/" By
	Contribution Margin Per Unit =	$                           30
	Break Even point =	8500	Units
	Answer = 8,500 Units
	Answer = B)
	CALCULATION OF CONTRIBUTION MARGIN
	PARTICULARS	AMOUNT
	Selling Price Per Unit=	$                           66
	Less: Variable Cost Per Unit	$                           39
	Contribution Margin Per Unit	$                           27
	CALCULATION OF THE BREAK EVEN POINT IN UNITS
	Break Even point =      Fixed Cost / Contribution Margin Per Unit
	Break Even point =
	Fixed Cost =	$               2,00,000
	Divide By	"/" By
	Contribution Margin Per Unit =	$                           27
	Break Even point =	7,407.41	Units
	Break Even point (Round off)	7,407	Units
	Answer = 7,407 Units
	Answer = C)
	Under the new plan profitability is more at certain level only, once the fixed cost is
	recover from the exceeded variable cost than the old plan is more profitrable because
	in old plan variable expenses is less.
	It mesn the current new is profitable only if the colume Is not more high