Pura Vida manufactures a single product. The product sells for $20. The variable manufacturing cost per unit is $4 and the variable selling cost is $4 per unit. Ryan incurs monthly fixed costs of $100,000 for manufacturing and $140,000 for administration and selling. If Ryan raises its selling price by 5% in response to a 5% increase in variable costs, and income taxes are 40%, its new breakeven point in sales dollars (relative to that of the original data above) will be:

Question

Quizplus · Accepted Answer

The breakeven point in sales dollars will remain unchanged because the percentage increase in selling price is equal to the percentage increase in variable costs, meaning the contribution margin ratio remains the same. Fixed costs and the tax rate do not affect the calculation of the breakeven point in sales dollars.

Pura Vida Manufactures a Single Product