Dann Druff owns a company that produces organic shampoos and soaps. Currently Da

Question

Dann Druff owns a company that produces organic shampoos and soaps. Currently Dann sells a bottle of shampoo for $3.75. Variable costs are $1.75 (includes the bottle). The cost of his warehouse and delivery trucks was $145,000. Dann has heard about a new bottle filling machine that is 20% more efficient than his current machine. The advertised price of the machine is $42,000. Dann believes that if he buys the machine, his variable costs will decrease by 20%.  

     a. What is the breakeven point before purchase of the new machine?

       b. What is the breakeven point after the purchase of the new machine?

       c. Should Dann purchase the machine? If not, why? If yes, under what conditions?

Explanation / Answer

1 Selling price per unit 3.75 Less Variable cost per unit 1.75 Contribution margin per unit 2 Breakeven in units = Fixed cost / contribution margin per unit Fixed cost 145000 Contribution margin per unit 2 Breakeven (in units) 72500 Bottles 2 Selling price per unit 3.75 Less Variable cost per unit 1.40 (1.75*80%) Contribution margin per unit 2.35 Breakeven in units = Fixed cost / contribution margin per unit Fixed cost 187000 (145000+42000) Contribution margin per unit 2.35 Breakeven (in units) 79574 Bottles 3 No machine should not be purchased as it increase the breakeven point

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