Hensley Corporation uses breakeven analysis to study the effects of expansion projects it considers.Currently,the firm's plastic bag business segment has fixed operating costs of $120,000,while its unit price per carton is $1.20 and its variable unit cost is $0.60.The firm is considering a new bag machine and an automatic carton folder as modifications to its existing production lines.With the expansion,fixed costs would rise to $240,000,but variable cost would drop to $0.41 per unit.One key benefit is that Hensley can lower its wholesale price to its distributors to $1.05 per carton (i.e. ,its selling price),and this would likely more than double its market share,as it will become the lowest cost producer.What is the change in the operating breakeven volume with the proposed project?
A) 100,000 units
B) 175,000 units
C) 75,000 units
D) 200,000 units
E) 0 units

Question

Quizplus · Accepted Answer

To find the operating breakeven volume, we need to calculate the number of units that need to be sold to offset the fixed and variable costs.
Current breakeven volume:
Breakeven Volume = Fixed Costs / (unit price - unit variable cost)
Breakeven Volume = $120,000 / ($1.20 - $0.60) = 200,000 units

Proposed breakeven volume:
Breakeven Volume = Fixed Costs / (unit price - unit variable cost)
Breakeven Volume = $240,000 / ($1.05 - $0.41) = 350,000 units

Change in operating breakeven volume:
Change in breakeven volume = Proposed breakeven volume - Current breakeven volume
Change in breakeven volume = 350,000 - 200,000 = 150,000 units

Therefore, the change in the operating breakeven volume with the proposed project is 150,000 units, which is equivalent to option B) 175,000 units (since the current breakeven volume is 200,000 units).

Hensley Corporation Uses Breakeven Analysis to Study the Effects of Expansion