Question

Rosario Company, which is located in Buenos Aires, Argentina, manufactures a component used in farm machinery. The firm's fixed costs are 3,900,000 p per year. The variable cost of each component is 1,800p, and the components are sold for 3,100 p each. The company sold 5,300 components during the prior year. (p denotes the peso, Argentina's national currency. Several countries use the peso as their monetary unit. On the day this exercise was written, Argentina's peso was worth .192 U.S. dollars. In the following requirements, ignore income taxes)
1) Compute the break even point in units.

2) What will the new break-even point be if fixed costs increase by 10 percent?

3) What was the company net income for the prior year?

4) The sales manager believes a reduction in the sales price to 2,600 p will result in orders for 800 more components each year. What will the break even point be if the price is changed?

Answer 1

Answer:

Part 1) Compute the break even point in units.

break even point in units  = 3,000 units

Part 2) New break-even point be if fixed costs increase by 10 percent

break even point in units   = 3,300 units

Part 3) Company net income for the prior year

Net Income  = 2,990,000

Part 4) Break even point be if the price is changed

break even point in units = 4,875 units

Explanation:

Part 1) Compute the break even point in units.

break even point in units = Fixed Cost / Contribution per unit

                                            = 3,900,000/3100-1800

                                            = 3,000 units

Part 2) New break-even point be if fixed costs increase by 10 percent

break even point in units = Fixed Cost / Contribution per unit

                                            = 3,900,000×1.10/3100-1800

                                            = 3,300 units

Part 3) Company net income for the prior year

Net Income = Contribution - Fixed Cost

                     = 5300×(3100p-1800p)-3900000

                     = 2990000

Part 4) Break even point be if the price is changed

break even point in units = Fixed Cost / Contribution per unit

                                            = 3,900,000/2600-1800

                                            = 4,875 units