Mae Company sells its product for $7 per unit and has variable costs of $3 per unit. Total fixed costs are $72,000. Suppose variable costs increase by 20% due to an increase in the cost of direct materials. What will be the effect on the breakeven point in units?

Question

Quizplus · Accepted Answer

The breakeven point in units increases when variable costs per unit increase. Initially, the contribution margin per unit is $4 ($7 - $3). After a 20% increase, the variable cost per unit becomes $3.6 ($3 * 1.20), reducing the contribution margin to $3.4 ($7 - $3.6). With higher variable costs, more units must be sold to cover the same fixed costs, thus increasing the breakeven point.

Mae Company Sells Its Product for $7 Per Unit and Has