2. Evergreen Fertilizer Company produces fertilizer. The company’s fixed monthly

Question

2. Evergreen Fertilizer Company produces fertilizer. The company’s fixed monthly cost is $25,000, and its variable cost per pound of fertilizer is $0.20. Evergreen sells the fertilizer for $0.45 per pound. Determine the monthly break-even volume for the company. If Evergreen Fertilizer Company in problem 2 changes the price of its fertilizer from $0.45 per pound to $0.55 per pound, what effect will the change have on the break-even volume? If Evergreen Fertilizer Company increases its advertising expenditure by $10,000 per year, what effect will the increase have on the break-even volume computed in problem 2?

Explanation / Answer

(2)

(a) Breakeven volume = Fixed cost / (Selling price - Unit variable cost) = $25,000 / $(0.45 - 0.2)

= 25,000 / 0.25

= 100,000 units

(b)

New breakeven volume = $25,000 / $(0.55 - 0.20) = 25,000 / 0.35 = 71,429 units

So breakeven volume will decrease.

(c) Advertising will increase fixed costs by $10,000 to $35,000.

New breakeven voume = $35,000 / $(0.45 - 0.2) = 35,000 / 0.25 = 140,000 units

So, breakeven volume will increase.

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