Question

Gleason sells a single product at $14 per unit. The firm's most recent income statement revealed unit sales of 80,000, variable costs of $800,000, and fixed costs of $560,000. Management believes that a $3 drop in selling price will boost sales volume (in units) by 20%. How these two changes will affect the company's break-even volume in units?

Answer 1

Answer:

Instructions are below.

Explanation:

Giving the following information:

Selling price= $14

Units sold= 80,00

Total variable cost= $800,000

Total fixed costs= $560,000

New selling price= $11

First, we need to calculate the unitary variable cost:

Unitary variable cost= 800,000/80,000= $10

Now, we can calculate the actual break-even point in units using the following formula:

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 560,000 / (14 - 10)

Break-even point in units= 140,000 units

Finally, we determine the new break-even point in units using the selling price of $11.

Break-even point in units= 560,000 / (11 - 10)

Break-even point in units= 560,000 units