Question

Maya company manufactures a product which sells for $20 each. each unit of product has a variable cost of $5 to manufacture. fixed costs normally incurred are $60,000. maya company is considering automating the manufacturing process, which would require a capital investment which would increase fixed costs by $30,000. as a result of the automation, variable costs would decrease by 20%. what would the new breakeven level in units be for maya company if it decides to automate the manufacturing process? 6,000 units. 3,750 units. 4,000 units. 5,625 units.

Answer 1

The answer is 5,625 units. The initial variable cost is 5 dollars. We know 20% of 5 is 1, so a decrease of 20% is 5 minus 1, which equals 4. The new variable cost per unit is 4 dollars. The initial fixed cost is 60,000 dollars. The capital investments adds 30,000 to fixed costs, so the new fixed cost is 90,000. We can compare the cost amount to the amount earned from selling each unit at 20 dollars per unit. We check that 4 dollars times 5,625 is equal to 22,500 dollars. Then we see that 22,500 plus 90,000 equals 112,500 dollars in costs. Then we check that 20 dollars times 5,625 is equal to 112,500 dollars in sales. Since the cost value is equal to the sales amount, we have found the breakeven level in units.