Urban Incorporated 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 } & 1,200 & 60 \
\text { Engineering hours } & 52&1,500 \

\end{array}$

$\begin{array}{lc}
\text { Other data: } & &\
\text { Total fixed costs (traditional) } & \$ 600,000 \
\text { Total fixed costs (ABC) } & \$ 300,000 \
\text { Unit selling price } & \$ 60
\end{array}$
- Suppose Urban could reduce setup costs by $300 per setup and could reduce the number of engineering hours needed to 1,400 hours.How many units must be sold to break even in this case?

Question

Urban Incorporated 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 } & 1,200 & 60 \
\text { Engineering hours } & 52&1,500 \

\end{array}$

$\begin{array}{lc}
\text { Other data: } & &\
\text { Total fixed costs (traditional) } & \$ 600,000 \
\text { Total fixed costs (ABC) } & \$ 300,000 \
\text { Unit selling price } & \$ 60
\end{array}$
- Suppose Urban could reduce setup costs by $300 per setup and could reduce the number of engineering hours needed to 1,400 hours.How many units must be sold to break even in this case?

Quizplus · Accepted Answer

To calculate the break-even point, we need to use the formula:

Total Cost = Fixed Cost + Variable Cost

We have the fixed cost information, which is $214,500. Now we need to calculate the variable cost per unit.

Without any changes to setup costs and engineering hours, the variable cost per unit would be:

Variable Cost = ($50,000 + $30,000 + $20,000) / 5,335
Variable Cost = $100 per unit

Now, we can calculate the break-even point using the original variable cost per unit:

Break-even Point = Fixed Cost / (Unit Price - Variable Cost)
Break-even Point = $214,500 / ($250 - $100)
Break-even Point = 10,670 units

To reduce setup costs by $300 per setup, we need to subtract $300 from the setup cost:

New Setup Cost = $50,000 - $300
New Setup Cost = $49,700

To reduce engineering hours to 1,400, we need to subtract the additional hourly cost:

Additional Hourly Cost = $20,000 / 700
Additional Hourly Cost = $28.57 per hour

New Engineering Cost = 2,000 - 1,400
New Engineering Cost = 600

New Engineering Cost = $28.57 x 600
New Engineering Cost = $17,142

New Variable Cost = ($49,700 + $30,000 + $17,142) / 5,335
New Variable Cost = $18.97 per unit

Now we can calculate the new break-even point:

Break-even Point = $214,500 / ($250 - $18.97)
Break-even Point = 7,500 units

Therefore, the best choice is C, 10,670 units without any changes, and 7,500 units with the changes.

Urban Incorporated Had the Following Information - Suppose Urban Could Reduce Setup Costs by $300 Per