Kent Manufacturing produces a product that sells for $50.00. Fixed costs are $260,000 and variable costs are $24.00 per unit. Kent can buy a new production machine that will increase fixed costs by $11,400 per year, but will decrease variable costs by $3.50 per unit.
-What effect would the purchase of the new machine have on Kent's break-even point in units?

Question

Kent Manufacturing produces a product that sells for $50.00. Fixed costs are $260,000 and variable costs are $24.00 per unit. Kent can buy a new production machine that will increase fixed costs by $11,400 per year, but will decrease variable costs by $3.50 per unit. 
-What effect would the purchase of the new machine have on Kent's break-even point in units?

Quizplus · Accepted Answer

The new machine increases fixed costs by $11,400 but decreases variable costs by $3.50 per unit. The decrease in variable costs reduces the contribution margin per unit from $26 to $29.50. The new break-even point is calculated as $271,400 / $29.50 = 9,200 units, compared to the old break-even point of $260,000 / $26 = 10,000 units, resulting in an 800 unit decrease.

Kent Manufacturing Produces a Product That Sells for $50