Management at the Trapper Company currently sells its products for $200 per unit and is contemplating a 50% increase in the selling price for the next year. Variable costs are currently 25% of sales revenue and are not expected to change in dollar amount on a per unit basis next year (the company will still pay the same variable cost per unit). Fixed expenses are $120,000 per year. If fixed costs were to decrease 10% during the current year and the new selling price goes into effect, how many units will need to be sold to break even?

Question

Quizplus · Accepted Answer

The new selling price per unit is $200 + (50% of $200) = $300. Variable costs are 25% of the original sales revenue, which is 25% of $200 = $50 per unit. Fixed costs decrease by 10%, so the new fixed costs are $120,000 - (10% of $120,000) = $108,000. The contribution margin per unit is the new selling price minus variable costs per unit, which is $300 - $50 = $250. To find the break-even point in units, divide the total fixed costs by the contribution margin per unit: $108,000 / $250 = 432 units.

Management at the Trapper Company Currently Sells Its Products for $200