Ciao Company manufactures a single product. The product sells for $10. The variable manufacturing cost per unit is $2 and the variable selling cost is $2 per unit. Ciao incurs monthly fixed costs of $100,000 for manufacturing and $140,000 for administration and selling.
Ciao Company is considering changes to its production and distribution procedures. If the changes are made, total variable costs (manufacturing and selling) will be $3 and total fixed costs (manufacturing, administration, and selling) will be $350,000 per month. The selling price will remain at $10. If the changes are made, the number of units required to break even will be:
A) Greater than before
B) The same as before
C) Less than before
D) Cannot be determined

Question

Quizplus · Accepted Answer

The break-even point is calculated by dividing total fixed costs by the contribution margin per unit (selling price minus variable costs). Initially, the contribution margin is $6 ($10 - $4) and fixed costs are $240,000, resulting in a break-even point of 40,000 units. With the changes, the contribution margin becomes $7 ($10 - $3) and fixed costs increase to $350,000, resulting in a break-even point of 50,000 units. Therefore, the number of units required to break even will be greater than before.

Ciao Company Manufactures a Single Product