Question

Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester's current break-even sales are $400,000 and current break-even units are 4,000. If Forrester purchases this new equipment, the revised break-even point in units would:

Answer 1

Answer:

"Decrease by 250" is the appropriate response.

Explanation:

The given values are:

Revised fixed cost,

= $150,000

Current selling price,

= $100

Current variable cost,

= $60

Current contribution will be:

=  $Current \ selling \ price-Current \ variable \ cost$

=  $100-60$

=  $40$

Now,

The revised BEP will be:

=  $\frac{Revised \ fixed \ cost}{Revised \ contribution}$

On substituting the values, we get

=  $\frac{150,000}{40}$

=  $3750 \ units$

hence,

=  $4000-3750$

=  $250$

Thus the above is the correct answer.