Question

Kent Co. manufactures a product that sells for $60.00. Fixed costs are $285,000 and variable costs are $35.00 per unit. Kent can buy a new production machine that will increase fixed costs by $15,900 per year, but will decrease variable costs by $4.50 per unit. What effect would the purchase of the new machine have on Kent's break-even point in units?

Answer 1

0riginal break even point:

285000/ 60/35 = $166,250

New break even point = new fixed costs / ( selling price - variable cost/ selling price)

New break even point = 285,000 + 15,900. / ( 60-( 35-4.50)/60

300,900 / 60-30.50/60 = $612,000

The new break even point increases.