Question

Flying Cloud Co. has the following operating data for its manufacturing operations: Unit Selling price $250 Unit Variable Cost 100 Total fixed costs 840,000 The company has decided to increase the wages of hourly workers which will increase the unit variable cost by 10%. Increases in the salaries of factory supervisors and poverty taxes for the factory will increase fixed costs by 4%. If sales prices are held constant, the next break even point for Flying Cloud Co. will be: a. increased by 640 units b. increased by 400 units c. decreased by 640 units d. increased by 800 units Please show work

Answer 1

Answer:

Option (A) is correct.

Explanation:

Initial break even:

Let x be the no. of units in the initial break even.

Sales = Costs

Unit Selling price × No. of units = Unit Variable Cost × No. of units + Total fixed costs

250 × x = 100 × x + 840,000

150 × x = 840,000

x = 5600 units

10% increase in variable cost(new):

= Unit Variable Cost + 10% of Unit Variable Cost

= 100 + 100 × 0.10

= 110

4% increase in fixed cost(new):  

= Total fixed costs + 4% of Total fixed costs

= 840,000 + 840,000 * 0.04

= 873,600

Break Even:

Let y be the no. of units in the break even.

Sales = Costs

Unit Selling price × No. of units = Unit Variable Cost new × No. of units + Total fixed costs new

250 × y = 110 × y + 873,600

140 × y = 873,600

y = 6,240

Change = y - x

Change = 6,240 - 5,600

Change = 640 increase