Jarvis Foods produces a gourmet condiment which sells for $10.00 per unit. Variable costs are $7.50 per unit, and fixed costs are $18 000 per month. Jarvis is currently selling 8 000 units per month. If Jarvis is forced to reduce the selling price down to $9.00 per unit, and volume remains constant, how will that affect its breakeven point in dollars?

Question

Quizplus · Accepted Answer

The breakeven point in units is calculated by dividing fixed costs by the contribution margin per unit. The contribution margin per unit is the selling price minus variable costs. Initially, the contribution margin is $2.50 ($10.00 - $7.50). With the price reduction, the new contribution margin is $1.50 ($9.00 - $7.50). The breakeven point in units increases, and when converted to sales revenue, it results in an increase of $36,000.

Jarvis Foods Produces a Gourmet Condiment Which Sells for $10