Asked by terrence showers on Jul 19, 2024
Verified
Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit.The selling price of $100 is not expected to change.Forrester's current break-even sales are $400,000 and current break-even units are 4,000.If Forrester purchases this new equipment,the revised break-even point in dollars would be:
A) $300,000.
B) $400,000.
C) $325,000.
D) $500,000.
E) $375,000.
Break-Even Point
The level of sales at which total revenues equal total costs, resulting in no profit or loss for the business.
Variable Costs
Costs that vary directly with the level of production or service activity, such as materials and labor.
Fixed Costs
Costs that do not fluctuate with the level of production or sales, such as rent, salaries, and insurance premiums.
- Examine the influence of changes in fixed outlays, variable outlays, and selling price on the break-even point and contribution margin.
Verified Answer
CR
Christopher RogersJul 24, 2024
Final Answer :
E
Explanation :
The revised break-even point in dollars can be calculated using the formula: Break-even point in dollars = Fixed Costs / (1 - Variable Costs / Selling Price). With the new equipment, fixed costs increase to $150,000, and variable costs per unit decrease to $60 ($70 - $10). Therefore, the revised break-even point in dollars is $150,000 / (1 - $60 / $100) = $150,000 / (1 - 0.6) = $150,000 / 0.4 = $375,000.
Learning Objectives
- Examine the influence of changes in fixed outlays, variable outlays, and selling price on the break-even point and contribution margin.