American Corporation currently sells its products for $200 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 on a dollar per unit basis for next year (the company will pay the same amount for variable costs next year). Fixed expenses are $120,000 per year. If fixed costs increase 10% next year, and the new selling price per unit goes into effect, how many units will need to be sold to break even?

Question

Quizplus · Accepted Answer

To find the break-even point, calculate the new selling price, variable costs, and fixed costs. New selling price = $200 + 20% of $200 = $240. Variable cost per unit = 40% of $200 = $80. New fixed costs = $120,000 + 10% of $120,000 = $132,000. Break-even point in units = Fixed Costs / (Selling Price - Variable Cost) = $132,000 / ($240 - $80) = 825 units.

American Corporation Currently Sells Its Products for $200 Per Unit