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Changes in Break-Even

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Jay Linoleum Company has fixed costs of $70,000. Its product currently sells for $4 per unit and has variable costs per unit of $2.60. Mr. Thomas, the head of manufacturing, proposes to buy new equipment that will cost $300,000 and drive up fixed costs to $105,000. Although the price will remain at $4 per unit, the increased automation will reduce variable costs per unit to $2.25.

As a result of Thomas' suggestion, will the break-even point go up or down? Compute the necessary numbers.

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Solution Summary

The solution studies the break-even point and if it goes up or down.

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Current break even point:

70000/(4-2.5)=70000-1.5= 46666.66 Units.

(We divided the total ...

Solution provided by:
Sandeep Bardia, MBA
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  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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