Question

A company is using the breakeven chart to evaluate the decision of buying new machinery that will increase its fixed costs by $200,000 Below is the information of the company Variable cost per unit = $60 Total revenue = $1,360,000 Units sold = 8,500 units Total Cost = $710,000

a. Total fixed costs after increase of $200,000 is:

b. Total variable cost of the company:

c. New total costs after addition of $200,000

d. Breakeven point is equal to (after increase of fixed costs):

e. What is the margin of safety at an output level of 5,000 and the new TC after addition of $200,000? (Profit = Total revenue - Total costs)

f. If the company decided to lease a more advanced machine instead of buying the older one, the fixed cost will increase by $300,000 but the variable cost will decrease to be $40 per unit. Calculate the new break-even point (approximate)

Answer 1

Answer		P.U.
	Unit		8,500
	Sales	160	$        1,360,000	($13,60,000/8500)
	Total Cost		$            710,000
b	Variable Cost	60	$         (510,000)	(8500*$60)
	Fixed Cost		$            200,000
	Addition to Fixed cost		$            200,000
a	New Fixed Cost		$            400,000
c	New Total Cost		$            910,000
	Contribution ratio		62.5%	($160-60)/160
d	Break-even point($)		$            640,000	($400,000/62.5%)
	Break-even point(Unit)		4,000	($6,40,000/$160)
	*Break-even point($) =Total Fixed cost/Contribution margin ratio
e	Margin of Safety= Current sales -Break-even sales
	Margin of Safety= (5000 unit*$160) -$6,40,000
	Margin of Safety= $800,000-$6,40,000= $160,000
		P.U.
	Unit
	Sales	$    160.00
	Variable Cost	$      40.00
	Contribution	$    120.00
	Contribution ratio		75%	($120/$160)
	Current Fixed cost		$            200,000
	Addition to Fixed cost		$            300,000
	New Fixed Cost		$            500,000
f	New Break-even point($)		$            666,667	($500,000/75%)
	New Break-even point(Unit)		$                4,167	($6,66,667/$160)

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