Question

In 2012, Carow sold 3,000 units at $500 each. Variable expenses were $250 per unit, and fixed expenses were $250,000. The same selling price is expected for 2013. 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 2013?
a. 1,000
b. 1,200
c. 1,250
d. 1,500

Answer 1

Answer:

A) 1,000 units

Explanation:

We first calculate the revised Fixed and Variable costs for 2013

In 2013,

Fixed costs = 250,000 * 1.20 = $300,000 as a result of 20% increase

Variable costs = 250 * 0.8 = $200 per unit as a result of 20% reduction

This gives us a contribution per unit of,

Contribution = Selling price - Variable costs = 500 - 200 = $300 per unit.

Revised break even point then,

Break even = Fixed Costs / Contribution per unit

Break even = 300,000 / 300 = 1000 units

Hope that helps.