Question

Annual fixed costs for a product are $75,000. The product itself sells for $6 and it costs $2 in variable costs to make each product.
By how many units will the annual break-even point for the product change if the variable cost per unit goes up to $2.50?

Answer 1

Given

Annual fixed costs for a product are $75,000.

The product i sells for $6

it costs $2 in variable costs to make each product.

the variable cost per unit goes up to $2.50

find out how many units will the annual break-even point for the product change .

To proof

FORMULA

Break even = Fixed cost ÷  Contribution margin per unit

where

Contribution margin per unit = sale price - variable price

Take two cases

Case first

fixed costs for a product =  $75,000

product itself sells =  $6

variable costs  = $2

put all the value in the above equation

we get

Contribution margin per unit = 6 - 2

                                               = 4

$Break even (say B1 ) = \frac{75000}{4}$

                                        = 18750 units

CASE SECOND

 the variable cost per unit goes up to $2.50

put value inthe formula

Contribution margin per unit = 6 - 2.50

                                               = 3.5

$Break even (say B2 ) = \frac{75000}{3.5}$

we get

Breakeven (sayB2) = 21428.6 unit

change in the break even product = B2- B1

                                                         = 21428.6 - 18750

                                                        =  2678.6 unit

Hence proved