Question

Kent Manufacturing produces a product that sells for $50.00. Fixed costs are $260,000 and variable costs are $24.00 per unit. Kent can buy a new production machine that will increase fixed costs by $11,400 per year, but will decrease variable costs by $3.50 per unit. What effect would the purchase of the new machine have on Kent's break-even point in units

Answer 1

Answer:

The purchase of the new machine will decrease Kent's break-even point in units.

Explanation:

If we divide fixed costs by the revenue per unit minus the variable cost per unit, we have the break-even point in units.

The actual break-even point is 10,000 units. Let see it with the numbers.

260,000/(50-24)=10,000

The possible break-even point if Kent boghts the machine, is 9,200 because

(260,000+11,400)/(50-24-3.50)=9,200

in conclusion, the break-even point in units decreases.