Question

The Great Fish Taco Corporation currently has fixed operating costs of $15,000​, sells its​ pre-made tacos for $6.00 per​ box, and incurs variable operating costs of $2.50 per box.
If the firm has a potential investment that would simultaneously raise its fixed costs to $16,500 and allow it to charge a​ per-box sale price of $6.50 due to​ better-textured tacos, what will the impact be on its operating breakeven point in​ boxes?

Answer 1

Answer: The Break-Even Point will reduce from $4,285.71 to $4,125

Explanation:

To get the Break-Even Point we can divide Fixed Assets by the Contribution margin.

The Contribution Margin is the Selling Price minus the Variable Cost.

For Scenario 1 the Break-Even Point will be,

= 15,000 / ( 6 - 2.50)

= $4,285.71

For Scenario 2 the Break-Even Point is,

= 16,500 / 6.5 -2.5

= $4,125

The Break-Even Point for Scenario 2 means that even though the higher Fixed Costs could have led to a higher Break-Even Point, the higher price contributed more than the fixed costs did and led to an ultimately lower Break-Even Point than the first Scenario.