Moe's Garage management has budgeted the following amounts for its next fiscal year: If Moe's can reduce fixed expenses by $20,000, by how much can variable expenses per unit increase and still allow the company to maintain the original breakeven sales in units?

Question

Moe's Garage management has budgeted the following amounts for its next fiscal year:  If Moe's can reduce fixed expenses by $20,000, by how much can variable expenses per unit increase and still allow the company to maintain the original breakeven sales in units?

Quizplus · Accepted Answer

To solve this problem, we need to use the breakeven formula:

Breakeven Sales = Fixed Costs / (Price per unit - Variable Costs per unit)

Let x be the original variable cost per unit. Then the original breakeven sales in units is:

500,000 = 400,000 / (60 - x) 
60 - x = 0.8 
x = 59.2

This means that Moe's currently spends $59.2 on variable costs for each unit sold.

Now we need to find the new variable cost per unit (let's call it y) that allows Moe's to maintain the original breakeven sales after reducing fixed expenses by $20,000. We have:

500,000 = (400,000 - 20,000) / (60 - y) 
60 - y = (380,000 / 500,000) * 5 
y = 34

So Moe's can increase variable expenses per unit by $34 - $59.2 = $25.80 and still maintain the original breakeven sales.

The correct answer is therefore (C).

Moe's Garage Management Has Budgeted the Following Amounts for Its