Question

The Warren Watch Company sells watches for $25, fixed costs are $185,000, and variable costs are $15 per watch.

1. What is the firm's gain or loss at sales of 7,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent.
   $
   
   What is the firm's gain or loss at sales of 19,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent.
   $
2. 
   
3. What is the break-even point (unit sales)? Round your answer to the nearest whole number.
   _____ units
4. 
   
5. What would happen to the break-even point if the selling price was raised to $35?
   - select- 1-. The result is that the break-even point is higher. 2.- The result is that the break-even point remains unchanged. 3.-The result is that the break-even point is lower.
6. 
   
7. What would happen to the break-even point if the selling price was raised to $35 but variable costs rose to $28 a unit? Round your answer to the nearest whole number.       -Select- 1.- The result is that the break-even point decreases. 2.-The result is that the break-even point remains unchanged. 3.-The result is that the break-even point increases.

Answer 1

Answer a.

Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin per unit = $25 - $15
Contribution margin per unit = $10

Operating income = Contribution margin per unit * Units sold - Fixed costs
Operating income = $10 * 7,000 - $185,000
Operating income = -$115,000

Answer b.

Operating income = Contribution margin per unit * Units sold - Fixed costs
Operating income = $10 * 19,000 - $185,000
Operating income = $5,000

Answer c.

Breakeven point = Fixed costs / Contribution margin per unit
Breakeven point = $185,000 / $10
Breakeven point = 18,500 units

Answer d.

Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin per unit = $35 - $15
Contribution margin per unit = $20

Breakeven point = Fixed costs / Contribution margin per unit
Breakeven point = $185,000 / $20
Breakeven point = 9,250 units

The result is that the break-even point is lower.

Answer e.

Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin per unit = $35 - $28
Contribution margin per unit = $7

Breakeven point = Fixed costs / Contribution margin per unit
Breakeven point = $185,000 / $7
Breakeven point = 26,429 units

The result is that the break-even point increases.