The Manhattan Company sells its one and only product for $89.00 per unit.Variable costs per unit amount to $63.50,and total fixed costs are $3,697,500.If Manhattan increases its total fixed costs by $267,500 it can reduce variable costs by $5.00 per unit.How will this affect the breakeven point in units?
A)The breakeven point will increase 48,415 units
B)The breakeven point will decrease 15,000 units
C)The breakeven point will increase 22,317 units
D)The breakeven point will decrease 32,540 units

Question

Quizplus · Accepted Answer

The original breakeven point in units can be calculated as follows:

Breakeven point = Total fixed costs / Contribution margin per unit

Contribution margin per unit = Selling price per unit - Variable costs per unit 
Contribution margin per unit = $89.00 - $63.50 
Contribution margin per unit = $25.50

Breakeven point = $3,697,500 / $25.50 
Breakeven point = 145,098 units

If Manhattan increases its total fixed costs by $267,500, the new total fixed costs will be:

New total fixed costs = $3,697,500 + $267,500 
New total fixed costs = $3,965,000

If Manhattan can reduce variable costs by $5.00 per unit, the new variable costs per unit will be:

New variable costs per unit = $63.50 - $5.00 
New variable costs per unit = $58.50

The new contribution margin per unit will be:

New contribution margin per unit = $89.00 - $58.50 
New contribution margin per unit = $30.50

The new breakeven point in units can be calculated as follows:

New breakeven point = New total fixed costs / New contribution margin per unit

New breakeven point = $3,965,000 / $30.50 
New breakeven point = 130,000 units

The difference between the original breakeven point and the new breakeven point is:

145,098 units - 130,000 units = 15,098 units

Therefore, the breakeven point will decrease by 15,098 units if Manhattan increases its total fixed costs by $267,500 and reduces variable costs by $5.00 per unit. The answer is B.

The Manhattan Company Sells Its One and Only Product for $89.00