In 2015, X Company had the following selling price and per-unit variable cost in

Question

In 2015, X Company had the following selling price and per-unit variable cost information:

In 2015, fixed overhead costs were $374,000, and fixed selling and administrative costs were $260,000.

In 2016, there are only two expected changes. Direct material costs are expected to decrease by 20% per unit, and fixed selling and administrative costs are expected to increase by $20,000. What must unit sales be in order for X Company to break even in 2016?

Selling price $186.00 Direct materials 43.10 Direct labor 14.30 Variable overhead 24.20 Variable selling and administrative 16.90

Explanation / Answer

Break even point is the level of sales at which profit is zero. According to this definition, at break even point sales are equal to fixed cost plus variable cost. This concept is further explained by the the following equation:

[Break even sales = fixed cost + variable cost]

Break even point in units = Fixed expenses / Unit contribution margin

Unit contribution margin = selling per per unit - variable cost per unit

for 2015, contribution per unit = 186 - (43.10+14.3+24.2+16.9)

=87.5

Break even point in units for 2015 = 374,000+260,000 / 87.5 = 7246 units

for 2016, their is an increase in fixed cost by $20,000 and

decrease in direct material cost by 20% per unit = 43.10 - 20% = 34.48

for 2016, contribution per unit = 186 - (34.48+14.3+24.2+16.9) = 96.12

Break even point in units for 2016 = 374,000+260,000+20,000 / 96.12 = 6804 units

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