Question

Problem 19-04

The manufacturer of a product that has a variable cost of $2.60 per unit and total fixed cost of $130,000 wants to determine the level of output necessary to avoid losses.

1. What level of sales is necessary to break-even if the product is sold for $4.35? Round your answer to the nearest whole number.

   _____ units

   What will be the manufacturer’s profit or loss on the sales of 104,000 units? Round your answer to the nearest dollar.

   $ ____

2. If fixed costs rise to $190,000, what is the new level of sales necessary to break-even? Round your answer to the nearest whole number.

   ______ units

3. If variable costs decline to $2.40 per unit, what is the new level of sales necessary to break-even? Round your answer to the nearest whole number.

   _____ units

4. If fixed costs were to increase to $190,000, while variable costs declined to $2.40 per unit, what is the new break-even level of sales? Round your answer to the nearest whole number.

   _____ units

5. If a major proportion of fixed costs were noncash (depreciation), would failure to achieve the break-even level of sales imply that the firm cannot pay its current obligations as they come due? Suppose $85,000 of the above fixed costs of $130,000 were depreciation expense. What level of sales would be the cash break-even level of sales? Use the initial variable cost in your calculations. Round your answer to the nearest whole number.

   ______ units

Answer 1

a.

Breakeven in units = Fixed cost/Contribution margin per unit

                               = $ 130,000/ ($ 4.35 - $ 2.60)

                               = $ 130,000/ $ 1.75

                                 = 74,285.71428571 or 74,286 units

Profit = (Contribution margin per unit x Number of unit sales) – fixed cost

         = $ 1.75 x 104,000 - $ 130,000

         = $ 182,000 - $ 130,000

         = $ 52,000

b.

Revised fixed cost = $ 190,000

Breakeven in units = Fixed cost/Contribution margin per unit

                               = $ 190,000/ ($ 4.35 - $ 2.60)

                               = $ 190,000/ $ 1.75

                                 = 108,571.428571429 or 108,571 units

c.

Revised variable cost = $ 2.40

Breakeven in units = Fixed cost/Contribution margin per unit

                               = $ 130,000/ ($ 4.35 - $ 2.40)

                               = $ 130,000/ $ 1.95

                                 = 66,666.66666667 or 66,667units

d.

Revised fixed cost = $ 190,000

Revised variable cost = $ 2.40

Breakeven in units = Fixed cost/Contribution margin per unit

                               = $ 190,000/ ($ 4.35 - $ 2.40)

                               = $ 190,000/ $ 1.95

                                 = 97,435.8974358975 or 97,436 units