Answer:
(a) Compute the break-even point in dollars for 2017. (Round final answer to 0 decimal places.)
total variable costs per unit = $1,750,000 / 500,000 = $3.50
sales price per unit = $2,500,000 / 500,000 = $5
contribution margin per unit = $5 - $3.50 = $1.50
total fixed costs = $850,000
break even point in units = $850,000 / $1.50 = 566,667 units
break even point in $ = 566,667 units x $5 = $2,833,335
(b) Compute the contribution margin under each of the alternative courses of action.
alternative 1) $6 - $3.50 = $2.50
alternative 2) $5 - $3.75 = $1.25
(c) Compute the break-even point in dollars under each of the alternative courses of action. (Round selling price per unit to 2 decimal places and other calculations to 0 decimal places.)
alternative 1:
break even point in units = $850,000 / $2.50 = 340,000 units
break even point in $ = 340,000 units x $6 = $2,040,000
alternative 2:
break even point in units = $760,000 / $1.25 = 608,000 units
break even point in $ = 608,000 units x $5 = $3,040,000
Which course of action do you recommend?
If I had to choose between alternative 1 or 2, I would choose alternative 1.
