The knight corporation projects the next year its fixed costs will total $240,00

Question

The knight corporation projects the next year its fixed costs will total $240,000. Its only product sells for $34 per unit, of which $18 is a variable cost. The management of Knight is considering the purchase of a new machine that will lower the variable cost per unit to $14. The new machine, however, will add to fixed costs through an increase in depreciation expense. How large can the addition to fixed costs be in order to keep the firm's break-even point in units produced and sold unchanged?

Explanation / Answer

Current break-even quantity = 240,000 / (34-18) = 15,000 units Profit = Quantity*(Price - Variable cost) - Fixed Cost 0 = 15000*(34 - 14) - Fixed Cost Fixed cost = 300,000 Thus, the additional fixed cost = 300,000 - 240,000 = 60,000

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