Question

A manufacturer contemplates a change in technology that would reduce fixed costs from $800,000 to $600,000, and reduce depreciation expense from $125,000 to $100,000. However, the ratio of variable costs to sales would increase from 68% to 80%. What would be the change in the break-even level of revenues?

Answer 1

Answer:

break-even level of revenues increases from $2,890,625 to $3,500,000

Explanation:

Break even point is the level of sales at which the company makes neither a Profit nor a loss.

Break -even Sales revenue = Fixed Cost / Contribution Margin Ratio

Old Break -even Sales revenue

Break -even Sales revenue =  ( $800,000 + $125,000)/(1.00-0.68)

                                              =  $925,000/ 0.32

                                              =   $2,890,625

Old Break -even Sales revenue

Break -even Sales revenue =  ( $600,000 + $100,000)/(1.00-0.80)

                                              =  $700,000/ 0.20

                                              =   $3,500,000