Question

Wang Co. manufactures and sells a single product that sells for $600 per unit; variable costs are $324 per unit. Annual fixed costs are $984,400. Current sales volume is $4,340,000. Compute the break-even point in dollars.

Multiple Choice

• $1,826,001.

• $2,061,248.

• $4,343,038.

• $3,045,648.

• $2,140,000.

Kent Co. manufactures a product that sells for $63.00. Fixed costs are $396,000 and variable costs are $30.00 per unit. Kent can buy a new production machine that will increase fixed costs by $19,800 per year, but will decrease variable costs by $4.80 per unit. What effect would the purchase of the new machine have on Kent's break-even point in units?

Multiple Choice

• No effect on the break-even point in units.

• 7,288 unit decrease.

• 6,989 unit increase.

• 1,000 unit increase.

• 1,000 unit decrease.

Answer 1

A) Computation of Break-even point ($)

Break-even point ($) = Fixed cost($) / Contribution margin (%)

   Fixed cost = $984,400

   Contribution margin = (Selling price per unit - Variable cost per unit) / Selling price per unit X 100

( $600 per unit - $324 per unit ) / $600 per unit X 100

= 46%

Break-even point ($) = $984,400 / 0.46 = $2,140,000

B) Computation of changes in Break-even point (units)

• Break-even point before new production machine

  Break-even point (units) = Fixed cost($) / Contribution per unit

   Fixed cost = $396,000

   Contribution per unit = Selling price per unit - Variable cost per unit

   = $63 per unit - $30 per unit

= $33 per unit

Break-even point (units) = $396,000 / $33 per unit

= 12,000units

• Break-even point after new production machine

  Break-even point (units) = Fixed cost($) / Contribution per unit

  Fixed cost ($396,000 + $19,800) = $415,800

    Contribution per unit = Selling price per unit - Variable cost per unit

Selling price per unit = $63 per unit

  Variable cost per unit ( $30 - $4.80 per unit) = $25.20 per unit

Contribution per unit = $63per unit - $25.20 per unit

   = $37.8 per unit   

  Break-even point (units) = $415,800 / $37.8 per unit

= 11,000 units

After new production machine bought the Break-even point is decreased by 1000 units (12,000units - 11,000units)