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Exercise 20-6 Compute break-even point in sales dollars and units under varying assumptions; comment on results...

Exercise 20-6
Compute break-even point in sales dollars and units under varying assumptions; comment on results
(L.O. 3, 4)


Never Late Delivery currently delivers packages for $9 each. The variable cost is $3 per package, and fixed costs are $60,000 per month. Compute the break-even point in both sales dollars and units under each of the following independent assumptions. Comment on why the break-even points are different.

a.   The costs and selling price are as just given.
b.   Fixed costs are increased to $75,000.
c.   Selling price is increased by 10%. (Fixed costs are $60,000.)
d.   Variable cost is increased to $4.50 per unit. (Fixed costs are $60,000 and selling price is $9.)

Solutions

Expert Solution

Solution:

selling price = $9

variable cost per unit = $3

Contribution margin per unit = 9 - 3 = 6

Fixed costs = $60,000

Break even point (dollars) = (fixed costs / contribution margin per unit) x selling price per unit

= (60,000 / 6) x 9 = $90,000

Break even point (units) = (fixed costs / contribution margin per unit) = (60000 / 6 ) = 10,000 units

b.

Fixed costs are increased to 75,000

Break even point (units) = 75,000 / 6 = 12,500 units

Break even dollars = (75000 / 6) x 9 = $112,500

c.

selling price is increased by 10% = 9 + (9 x 10%) = 9 + 0.9 = 9.9

Vairble cost per unit = 3

Contribution marginper unit = 9.9 - 3 = 6.9

fixed cost = 60,000

Break even units = 60,000 / 6.9 = 8696 units

Break even dollars = (60000 / 6.9) x 9.9 = $86086.95

d.

Variable cost is increased to 4.5 per unit (fixed cost = 60,000) and selling price is $9

Contribution margin per unit = 9 -4.5 = 4.5

Break even units = 60,000 / 4.5 = 13,333 units

Break even dollars = (60,000 / 4.5) x 9 = $120,000

Comment:

Here I comment on the break even points are different due to change in contribution margin and fixed cost which are two components for computing break even point and see which option are best. The 3rd option would be best because it's lower break even point therfore gives the least amount of risk.

ekkarill92 answered 1 year ago
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