X Company is considering a modification to one of its main products that would m

Question

X Company is considering a modification to one of its main products that would make it more attractive to customers. A market research study costing $7,000 was conducted, and it indicated that the company could increase the price of the product by $2.56 with no decrease in unit sales; the current price is $10.12. Variable costs for the product are $3.98 and will not change as a result of the modification, but additional equipment would have to be rented, increasing fixed costs from $11,690 to $16,600. At what unit sales level would X Company be indifferent between modifying the product and not modifying it?

Explanation / Answer

New sale sale price = $10.12 + 2.56 = $12.68

Variable cost = $3.98

Contribution margin = Sale price - variable cost = $12.68 - 3.98 = $8.70

new fixed cost = $16,600

Break even sales in units = Fixed cost / contribution margin per unit

= 16,600 / 8.70 = 1,908.04 or 1,909 units

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