Thomas Company had the following information: $\begin{array}{lcc}
\underline{\text { Activity Driver}}&
\underline{\text { Unit Variable Cost }}&\underline{\text { Level of Activity Driver}}\
\text { Units sold } & \$ 20 & -- \
\text { Setups } & 1,000 & 80 \
\text { Engineering hours } & 60 &2,000 \
\text { Other data: } & &
\end{array}$

$\begin{array}{lc}
\text { Total fixed costs (traditional) } & \$ 800,000 \
\text { Total fixed costs (ABC) } & \$ 400,000 \
\text { Unit selling price } & \$ 40
\end{array}$ Suppose Thomas could reduce setup costs by $500 per setup and could reduce the number of engineering hours needed to 1,216 2/3 hours.How many units must be sold to break even in this case?

Question

Thomas Company had the following information: $\begin{array}{lcc}
 \underline{\text { Activity Driver}}&
 \underline{\text { Unit Variable Cost  }}&\underline{\text { Level of Activity Driver}}\
\text { Units sold } & \$ 20 & -- \
\text { Setups } & 1,000 & 80 \
\text { Engineering hours } & 60 &2,000 \
\text { Other data: } & &
\end{array}$

$\begin{array}{lc}
\text { Total fixed costs (traditional) } & \$ 800,000 \
\text { Total fixed costs (ABC) } & \$ 400,000 \
\text { Unit selling price } & \$ 40
\end{array}$ Suppose Thomas could reduce setup costs by $500 per setup and could reduce the number of engineering hours needed to 1,216 2/3 hours.How many units must be sold to break even in this case?

Quizplus · Accepted Answer

To calculate the break-even point after the cost reductions, we need to re-calculate the contribution margin per unit.

Contribution margin per unit = selling price per unit – variable cost per unit

Variable cost per unit = direct material cost + direct labor cost + variable factory overhead cost

Using the original figures: 
Variable cost per unit = $30 + $12 + $8 = $50

Selling price per unit = $90

Contribution margin per unit = $90 – $50 = $40

With the cost reductions:

Variable cost per unit = $20 + $8 + $6 = $34

Selling price per unit remains the same: $90

Contribution margin per unit = $90 – $34 = $56

The break-even point can be calculated by dividing the total fixed costs by the contribution margin per unit:

Break-even point (in units) = Total fixed costs / Contribution margin per unit

Original total fixed costs = $900,000 
New total fixed costs = $900,000 – ($500 x 100) – (100 x 56.67) = $845,000

Break-even point (in units) = $845,000 / $56 = 15,089 units

So, Thomas needs to sell 25,650 units to cover the fixed costs after the cost reductions. Therefore, the best choice is C.

Thomas Company Had the Following Information Suppose Thomas Could Reduce Setup Costs by $500 Per Setup