Samson Company currently sells its products for $50 per unit. Management is contemplating a 20% increase in the selling price for the next year. Variable costs are currently 40% of sales revenue and are not expected to change in dollar amount on a per unit basis next year (the company will pay the same amount for variable costs next year). Fixed expenses are $80,000 per year. What is the break-even point in units at the anticipated selling price per unit next year?

Question

Quizplus · Accepted Answer

The first step is to determine the contribution margin per unit, which is the amount that each unit contributes to fixed costs and profit.

Contribution margin = Selling price per unit - Variable costs per unit

Variable costs are currently 40% of sales revenue, so variable cost per unit is:

Variable cost per unit = 40% x selling price per unit 
Variable cost per unit = 0.40 x $50 
Variable cost per unit = $20

Contribution margin per unit = $50 - $20 = $30

Next, we can use the contribution margin per unit to calculate the break-even point in units:

Break-even point (units) = Fixed costs / Contribution margin per unit

Break-even point (units) = $80,000 / $30

Break-even point (units) = 2,666.67

Since we cannot sell a fraction of a unit, we round up to the nearest whole number.

Break-even point (units) = 2,667

Finally, we need to adjust for the 20% increase in selling price:

New selling price per unit = $50 x 1.20 
New selling price per unit = $60

Using the same calculation as above:

Contribution margin per unit = $60 - $20 = $40

Break-even point (units) = $80,000 / $40 = 2,000

Therefore, the answer is choice C: 2,000 units.

Samson Company Currently Sells Its Products for $50 Per Unit