Scott Incorporated management has budgeted the following amounts for its next fiscal year: If fixed expenses increase by 10%, to maintain the original breakeven sales in units, the selling price per unit would have to be

Question

Scott Incorporated management has budgeted the following amounts for its next fiscal year:  If fixed expenses increase by 10%, to maintain the original breakeven sales in units, the selling price per unit would have to be

Quizplus · Accepted Answer

To maintain the original breakeven sales in units, the total contribution margin must equal the total fixed expenses. 
If fixed expenses increase by 10%, the new fixed expenses will be: 
$990,000 x 1.1 = $1,089,000

The new contribution margin per unit will be: 
$45 – ($30 + $12) = $3

To find the new breakeven sales in units, we divide the new fixed expenses by the new contribution margin per unit: 
$1,089,000 ÷ $3 = 363,000 units

To maintain the original breakeven sales in units (300,000 units), we need to increase the selling price per unit by:

($990,000 ÷ 300,000) x 100% = 330% of the variable cost per unit

330% x $12 = $39.60

The original selling price per unit was $45, so to increase it to $39.60, we need to increase it by:

($39.60 – $45) ÷ $45 x 100% = -11.33%

Therefore, the selling price per unit would need to be increased by 5.6% (Option C) to maintain the original breakeven sales in units when fixed expenses increase by 10%.

Scott Incorporated Management Has Budgeted the Following Amounts for Its