Martin Corporation currently sells 180,000 units per year at a price of $7.00 pe

Question

Martin Corporation currently sells 180,000 units per year at a price of $7.00 per unit; its variable cost is $4.20 per unit; and fixed operating costs are $400,000. Martin is considering expanding into two additional states which would increase its fixed costs to $650,000 and would increase its variable unit cost to an average of $4.48 per unit. If Martin expands it expects to sell 270,000 units at $7.00 per unit. By how much will Martin's operating breakeven sales dollar level change?


A. $183,333
B. $456,500
C. $805,556
D. $910,667
E. $1,200,000

Explanation / Answer

C. $805,556

                                        Current      After expansion
Sales (units)                      180,000           270,000
                                    ___________________________
Sales (dollar)                 $1,260,000       $1,890,000
Variable costs
180,000 x $4.20              $756,000
270,000 x $4.48                                   $1,209,600
                                 ___________________________
Contribution margin       $504,000         $680,400
P/V ratio                 $504,000/$1,260,000     $680,000/$1,890,000       
                                        40%                     36%  
Fixed costs                     $400,000           $650,000
Break even                $400,000/40%    $650,000/36%
                                 $1,000,000        $1,805,556

By how much will Martin's operating breakeven sales dollar level change?
             $1,805,556 - $1,000,000 = $805,556

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