Shawn Pen & Pencil Sets Inc. has fixed costs of $127,400. Its product currently

Question

Shawn Pen & Pencil Sets Inc. has fixed costs of $127,400. Its product currently sells for $6 per unit and has variable costs of $3.40 per unit. Mr. Bic, the head of manufacturing, proposes to buy new equipment that will cost $320,000 and drive up fixed costs to $188,500. Although the price will remain at $6 per unit, the increased automation will reduce costs per unit to $2.75.

Compute the following break-even points. (Do not round intermediate calculations. Round your answers to the nearest whole number.)

Compute the following break-even points. (Do not round intermediate calculations. Round your answers to the nearest whole number.)

Explanation / Answer

Contribution Margin Per Unit = Selling price per unit - Variable cost per unit Current Contribution margin per unit = $6 - $3.40 = $2.60 per unit Proposed Contribution margin per unit = $6 - $2.75 = $3.25 per unit Answer a Break even point (in units ) = Fixed cost / Contribution margin per unit Break even point Current break-even point 49000 Units Proposed break even point 58000 Units Answer b As a result of Bic’s suggestion, the break-even point will go up.

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