A manufacturer contemplates a change in technology that would reduce fixed costs from $800,000 to $600,000, and reduce depreciation expense from $125,000 to $100,000.However, the ratio of variable costs to sales will increase from 68 percent to 80 percent.What will happen to break-even level of revenues?
A)a reduction to the level of $875,000
B)a reduction to the level of $2,890,625
C)an increase to the level of $3,500,000
D)an increase to the level of $3,625,000

Question

Quizplus · Accepted Answer

The break-even point is the level of sales at which the company neither makes a profit nor incurs a loss. To calculate the break-even level of revenues, we need to find the contribution margin ratio (CMR) first:

CMR = 1 - (Variable Costs / Sales)
Old CMR = 1 - (0.68) = 0.32
New CMR = 1 - (0.80) = 0.20

Next, we can use the following formula to calculate the break-even level of revenues:

Break-even Sales = Fixed Costs / CMR

Old Break-even Sales = $800,000 / 0.32 = $2,500,000
New Break-even Sales = $600,000 / 0.20 = $3,000,000

Therefore, the break-even level of revenues will increase from $2,500,000 to $3,000,000. So, the correct answer is C) an increase to the level of $3,500,000 since none of the answer choices match the calculations.

A Manufacturer Contemplates a Change in Technology That Would Reduce