Elizabeth Langley Enterprises sells its product for $12 per unit and has variable costs of $10 per unit. Total fixed costs are $40,000. Suppose variable costs increase by 10% due to an increase in the cost of direct materials. What will be the effect on the break-even point in units?

Question

Quizplus · Accepted Answer

The break-even point in units increases when variable costs per unit increase. The original contribution margin per unit is $2 ($12 - $10). With a 10% increase in variable costs, the new variable cost per unit becomes $11 ($10 + 10% of $10), reducing the contribution margin per unit to $1 ($12 - $11). The break-even point is calculated as fixed costs divided by the contribution margin per unit. Originally, it was 20,000 units ($40,000 / $2). With the increase in variable costs, the new break-even point is 40,000 units ($40,000 / $1), indicating an increase from 20,000 units to 40,000 units.

Elizabeth Langley Enterprises Sells Its Product for $12 Per Unit