Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester's current break-even sales are $400,000 and current break-even units are 4,000.
-If Forrester purchases this new equipment, the revised break-even point in units would:

Question

Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester's current break-even sales are $400,000 and current break-even units are 4,000. 
-If Forrester purchases this new equipment, the revised break-even point in units would:

Quizplus · Accepted Answer

The contribution margin per unit before purchasing new equipment is $30 ($100 - $70).

After purchasing new equipment, the contribution margin per unit would increase by $10, making it $40 ($100 - $60).

Using the current fixed costs of $120,000 and the contribution margin per unit ($30), Forrester's current break-even point is 4,000 units ($120,000 ÷ $30).

Using the new fixed costs of $150,000 and the contribution margin per unit ($40), Forrester's new break-even point is 3,750 units ($150,000 ÷ $40).

Therefore, the revised break-even point in units would decrease by 250 units (4,000 - 3,750), making the answer A.

Forrester Company Is Considering Buying New Equipment That Would Increase