Funky Corporation management has budgeted the following amounts for its next fiscal year:

If Funky Corporation must increase fixed expenses by $50,400,then by how much must they decrease variable expenses per unit to allow the company to maintain the original break-even sales in units?

Question

Funky Corporation management has budgeted the following amounts for its next fiscal year:

If Funky Corporation must increase fixed expenses by $50,400,then by how much must they decrease variable expenses per unit to allow the company to maintain the original break-even sales in units?

Quizplus · Accepted Answer

The original break-even point can be calculated as follows:
Break-even point = Fixed expenses / Contribution margin per unit
= 420,000 / (9 – 4)
= 84,000 units

To maintain this break-even point after an increase in fixed expenses, we need to decrease the contribution margin per unit. Let x be the decrease in variable expenses per unit. Then the new contribution margin per unit is (9 – x). We also know that fixed expenses increase by $50,400. Therefore, the new break-even point is:

Break-even point = (Fixed expenses + Increase) / (Contribution margin per unit − Decrease)
= (420,000 + 50,400) / (9 − x)

To maintain the original break-even point, we set the new break-even point equal to 84,000 units:

(420,000 + 50,400) / (9 − x) = 84,000
Simplifying this equation gives:
x = $3.00

Therefore, Funky Corporation must decrease variable expenses per unit by $3.00 to maintain the original break-even sales in units. The answer is C.

Funky Corporation Management Has Budgeted the Following Amounts for Its