Question

The following information is given for XYZ, Corp and will be used to answer the next 7 questions

Sales price per unit                             $8.50

                                   

Direct labor per unit                           $1.90

Direct materials per unit                     $2.60

Variable overhead per unit                 $1.40

                                   

Factory overhead that does not change with volume $327,600

General and administrative expenses $194,000

Question 32 options:

1. If a proposal will increase the fixed costs by 10% and lower the direct materials per unit by $.50 what would be the new breakeven point in dollars (rounded)?

2. A proposal that would cause XYZ to become more leveraged would most likely entail which of the following?

A decrease in the contribution margin per unit
	An increase in variable overhead per unit
	A second product being introduced to the manufacturing process
	An increase in fixed overhead

Answer 1

Break even point units = Fixed cost / Contribution per unit

Fixed cost = (327600 + 194000) x 110% = 521600 x 110% = $573760

Contribution per unit = Selling price - Variable cost per unit

= 8.50 - (1.90 + 2.10 + 1.40 ) = 8.50 - 5.40 = $3.10

BEP Units = 573760 / 3.10 = 185084 units

BEP in Dollars = 185084 x $8.5 =$1573214

Proof

Sales	1573214
Variable cost	999454
Contribution	573760
Fixed cost	573760
Profit / Loss	0

Variable cost

	Old		New
Direct labour	1.9		1.9
Direct materials	2.6	0.5	2.1
Variable overhead per unit	1.4		1.4
	5.9		5.4

2.

A proposal that would cause XYZ to become more leveraged would most likely entail which of the following?

Ans : An increase in fixed overhead

If the firm becomes more leveraged, means increase in its debt capital, it would cause for increase in interest expenses which would definitely increase the fixed overhead. So this proposal would increase fixed overhead.

A decrease in the contribution margin per unit	Contribution margin will not be affected as this proposal will not make any changes to the selling price or variable cost.
An increase in variable overhead per unit	Interest expense is a fixed expense. So it will not affect Variable overhead per unit.
A second product being introduced to the manufacturing process	Increase in debt capital may not necessarily demand for introducing a second product being manufactured.