Question

Chester has negotiated a new labor contract for the next round that will affect the cost for their product Cell. Labor costs will go from $2.80 to $3.40 per unit. Assume all period and other variable costs remain the same. If Chester were to absorb the new labor costs without passing them on in the form of higher prices, how many units of product Cell would need to be sold next round to break even on the product

Answer 1

Answer:

Units to be sold = $\frac{TotalFixedCosts}{Current contribution/unit-0.60}$

Explanation:

If the selling price is to remain unchanged, and all other costs do not change except the increase in variable labour costs by 60 cents per unit ($3.40-$2.80 = $0.6), then the contribution  per unit is expected to go down by 60 cents.

New contribution = Current contribution - $0.60

Break even point in units = $\frac{TotalFixedCosts}{New Contribution/unit}$

=$\frac{TotalFixedCosts}{Current contribution/unit-0.60}$