Martin Corporation currently sells 180,000 units per year at a price of R7.00 per unit; its variable cost is R4.20 per unit; and fixed operating costs are R400,000.Martin is considering expanding into two additional provinces which would increase its fixed costs to R650,000 and would increase its variable unit cost to an average of R4.48 per unit.If Martin expands it expects to sell 270,000 units at R7.00 per unit.By how much will Martin's operating breakeven rand sales level change?

Question

Quizplus · Accepted Answer

The operating breakeven point is calculated by dividing fixed costs by the contribution margin per unit (selling price - variable cost). Initially, the breakeven point is 400,000 / (7.00 - 4.20) = 142,857 units. After expansion, it becomes 650,000 / (7.00 - 4.48) = 407,407 units. The change in breakeven sales level in units is 407,407 - 142,857 = 264,550 units. In rand sales, this is 264,550 units * R7.00 = R1,851,850. The change in breakeven sales level is R1,851,850 - (142,857 units * R7.00) = R805,556.

Martin Corporation Currently Sells 180,000 Units Per Year at a Price