Question

Laguna Print makes advertising hangers that are placed on doorknobs. It charges $0.20 and estimates its variable cost to be $0.16 per hanger. Laguna’s total fixed cost is $2,600 per month, which consists primarily of printer depreciation and rent. Suppose that the cost of paper has increased and Laguna’s variable cost per unit increases to $0.180 per hanger.
Required:
1. Calculate its new break-even point assuming this increase is not passed along to customers.

Answer 1

Answer:

The break-even point is 130,000 hangers

Explanation:

Break-even point is fixed costs divided by contribution margin per hanger

The fixed costs here is $2600

the contribution margin is computed thus:

Price per hanger        $0.20

variable costs             ($0.18)

Contribution margin    $0.02

The break-even point =$2600/$0.02

                                     =130,000 hangers

The fact that the increase in variable costs cannot be passed to customers implies that the price of the hanger remains $0.20 and the variable cost per unit becomes $0.18 instead of the original $0.16.

The break-even point is the number of hangers to be sold at which no gain or loss is realized.