Dundas Inc. 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. Dundas incurs monthly fixed costs of $100,000 for manufacturing and $140,000 for administration and selling.
If Dundas raises its selling price by 10% in response to a 10% 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 original breakeven point in units can be calculated as follows:

Fixed manufacturing cost + Fixed selling and administrative cost
----------------------------------------------------
Selling price per unit - Variable manufacturing cost per unit - Variable selling cost per unit

($100,000 + $140,000) 
--------------------------- 
($10 - $2 - $2)

= 40,000 units

To calculate the breakeven point in sales dollars, we can multiply the breakeven point in units by the selling price:

40,000 units x $10 per unit = $400,000

Now, if variable costs increase by 10%, the new variable manufacturing cost per unit would be $2.20 ($2 x 1.10) and the new variable selling cost per unit would be $2.20 as well ($2 x 1.10).

To maintain the same contribution margin per unit, the selling price will need to increase by 10% as well, or to $11 per unit ($10 x 1.10).

The new breakeven point in units can be calculated using the same formula as above, but with the updated variable costs and selling price:

($100,000 + $140,000) 
--------------------------- 
($11 - $2.20 - $2.20)

= 32,258 units

The new breakeven point in sales dollars can be calculated by multiplying the breakeven point in units by the new selling price:

32,258 units x $11 per unit = $354,838

Compared to the original breakeven point in sales dollars of $400,000, the new breakeven point in sales dollars is lower, because the increase in selling price more than offsets the increase in variable costs. Therefore, the answer is B, unchanged.