Question

In: Accounting

Assume Phony Company has variable costs per unit of $23, fixed costs of $600,000, and a...

Assume Phony Company has variable costs per unit of $23, fixed costs of $600,000, and a break-even point in units of 60,000 units. If the sales price per unit decreases by $4 and the variable cost per unit decreases by $4, what would happen to the break-even point?

A. Break-even point stays the same.

B. Break-even point increases.

C. Break-even point in dollars decreases.

D. Break-even point in dollars decreases and break-even point in units stays the same.

Solutions

Expert Solution

The answer is D. Break even point in dollar decreases and break even point in unit stays the same.

Solution :

Calculation of Selling Price (SP)

Breakeven point = Fixed cost / (Selling price - Variable cost)

60,000 = 6,00,000 / (SP - 23)

60,000 ( SP - 23) = $600,000

60,000SP - 1,380,000 = $ 600,000

60,000 SP = $ (600,000 + 1380,000)

60,000 SP = $19,80,000

SP = $19,80,000 / 60,000

SP = $33 per unit.

As given in question, if selling price and variable cost decreases by $4 therefore new selling price and variable cost will

Selling Price = $33 - $4 = $ 29 (new Selling price)

Variable Cost = $23 - $4 = $ 19 (new variable cost)

New Contribution Margin = (Selling price - Variable cost) / Selling price = $ (29-19) / $29 = 34%

Old Contribution Margin = (Selling price - Variable cost) / Selling price = $ (33-23) / $33 = 30%

Break Even point in units = Fixed Cost / (Selling Price - Variable Cost) = 600,000 / (29-19) = 60,000 units

Break even point is dollars for new Selling price and Variable cost = Fixed Cost / Contribution Margin = 600,000 / 34% = $ 1740,000

Break even point is dollars for old Selling price and Variable cost = Fixed Cost / Contribution Margin = 600,000 / 30% = $ 1980,000

Therefore the Break even point in Units still remains the same but Breakeven point in dollars decreases i.e (1980,000 - 1740,000)

Therefore the answer is D.

ekkarill92 answered 2 years ago
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