Question

In 2016, Carow sold 3,000 units, at $500 each. Variable expenses were $250 per unit, and fixed expenses were $500,000. The same selling price is expected for 2017. Carow is tentatively planning to invest in equipment, that would increase fixed costs by 20%, while decreasing variable costs per unit by 20%. What is Carow's break-even point, in units, for 2017?a. 2,400b. 2,500c. 3,000d. 2,000

Answer 1

Answer:

The correct answer is D.

Explanation:

Giving the following information:

In 2016, Carow sold 3,000 units, at $500 each. Variable expenses were $250 per unit, and fixed expenses were $500,000.

The same selling price is expected for 2017. Carow is tentatively planning to invest in equipment, that would increase fixed costs by 20% while decreasing variable costs per unit by 20%.

First, we need to calculate the ner fixed and variable costs:

Fixed costs= 500,000*1.20= $600,000

Variable costs= 250*0.8= $200

Now, we can calculate the break-even point:

Break-even point= fixed costs/ contribution margin

Break-even point= 600,000 / (500 - 200)= 2,000 units