Management at the Forrest Company currently sells its products for $225 per unit and is contemplating a 40% increase in the selling price for the next year.Variable costs are currently 25% of sales revenue and are not expected to change in dollar amount on a per unit basis next year (the company will still pay the same variable cost per unit).Fixed expenses are $120,750 per year.
If fixed costs were to decrease 10% during the current year and the new selling price goes into effect,how many units will need to be sold to breakeven?

Question

Quizplus · Accepted Answer

A)
Current year Sales price per unit $225
Variable expense 56.25 (25% of sales price)
Contribution Margin 168.75
CM % 75% (168.75 / 225)
New year Sales Price $315 (225 × 1.4)
Variable expense 56.25
Contribution margin 258.75
CM % 82.1% (258.75 / 315)
Fixed cost 108,675 (120,750 less 10%)
Units 420 (108,675 divided by 258.75CM)

Management at the Forrest Company Currently Sells Its Products for $225